-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WtS0hBEyvHZm3oK5DzsGOd3CNwLOupp8V1iALP8qAiPABdgkghZ32mxy60Xvg0g3 rMCh28iIflEQPeMcfpHQWg== 0000950144-98-003134.txt : 19980325 0000950144-98-003134.hdr.sgml : 19980325 ACCESSION NUMBER: 0000950144-98-003134 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980324 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHDYNE INFORMATION ENTERPRISES INC CENTRAL INDEX KEY: 0001000231 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 582112366 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27056 FILM NUMBER: 98571594 BUSINESS ADDRESS: STREET 1: 1850 PKWY PLACE STE 1100 CITY: MARIETTA STATE: GA ZIP: 30067 BUSINESS PHONE: 7704238450 MAIL ADDRESS: STREET 1: 1850 PKWY PLACE STE 1100 CITY: MARIETTA STATE: GA ZIP: 30067 10-K 1 HEALTHDYNE INFORMATION ENTERPRISES, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------- FORM 10-K --------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-27056 HEALTHDYNE INFORMATION ENTERPRISES, INC. (Exact name of registrant as specified in its charter) GEORGIA 58-2112366 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1850 PARKWAY PLACE, SUITE 1100 30067 MARIETTA, GEORGIA (Zip Code) (Address of principal executive offices) (770) 423-8450 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $.01 par value per share (together with associated preferred stock purchase rights) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] The aggregate market value of the registrant's Common Stock (based upon the closing sales price quoted on the Nasdaq National Market) held by nonaffiliates as of March 18, 1998 was approximately $41,598,047. As of March 18, 1998, 20,909,221 shares of the registrant's Common Stock, par value $.01 per share (together with associated preferred stock purchase rights), were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 1998 Annual Meeting of Shareholders are incorporated by reference into Part III. 2 PART I ITEM 1. BUSINESS Certain of the statements made in this Item 1 and in other portions of this Report and in documents incorporated by reference herein constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to differ materially from historical results or from any results expressed or implied by such forward-looking statements. Such factors include, without limitation, those discussed in "Business --Factors Affecting Future Performance" herein. See "Business -- Factors Affecting Future Performance -- Risks Associated with Forward-Looking Statements." INTRODUCTION Healthdyne Information Enterprises, Inc. ("HIE" or the "Company") provides software tools and services on a worldwide basis to enable its customers to achieve the enterprise-wide integration of information from the disparate information systems located throughout a typical enterprise. HIE's target customer is the "enterprise," which is either a single entity with multiple departments or multiple entities that are joined together to fulfill a common mission. HIE's integration software tools and skilled information technology professionals enable its customers to obtain mission-critical information for their operations, while protecting, rather than replacing, their existing information systems investment. HIE distributes its software through both an internal sales force and third parties. HIE offers an array of complementary services, including education, consulting, project management, information integration, technology-driven re-design, software maintenance, implementation and expert-sourcing. While approximately 88% of HIE's revenue is generated within the United States, HIE has customers in 18 countries and five continents. Substantially all of HIE's historical revenue was generated from the healthcare industry, but HIE is currently pursuing customers in other industries, such as banking and financial services. HIE's objective is to help its worldwide customers obtain and implement the most cost-effective, user-friendly system integration solutions possible. HIE was incorporated in Georgia on June 15, 1994 and was a wholly-owned subsidiary of Healthdyne, Inc. ("Healthdyne") until November 6, 1995 at which time Healthdyne distributed all of the outstanding shares of HIE to Healthdyne's shareholders (the "Spin-Off"). HIE's common stock is publicly traded on the Nasdaq National Market under the symbol "HDIE." HIE has three wholly-owned subsidiaries (Healthcare Communications, Inc. ("HCI"), Integrated Healthcare Solutions, Inc. ("IHS") and Criterion Health Strategies, Inc. ("CHS")). During November 1997, the operations of these subsidiaries were combined with the parent Company, HIE, under a functional organization structure, i.e., sales, service, research and development and finance. 2 3 HIE'S INTEGRATION SOLUTIONS The Company's objective is to become a leading international provider of system integration solutions. The key elements of the Company's strategy to accomplish this objective are (1) identify and focus on industry markets that present significant system integration opportunities; (2) develop or license leading-edge integration software tools that are easily transportable to the identified target markets; (3) establish comprehensive distribution channels for these integration software tools to the target markets; and (4) provide comprehensive integration services to the target markets. The Company expects the following external factors to affect the market for integration software tools and integration services in future years: the continued consolidation of enterprises within various industries to achieve economies of scale; (2) the growing importance of information for the survival and prosperity of various enterprises; (3) the increasing complexity of information technology; and (4) the year 2000 issue. The Company's integration engine has the capability to detect when a system is not Year 2000 compliant and has the capability to convert information that is not Year 2000 compliant into Year 2000 compliant information when it provides such information to a Year 2000 compliant system elsewhere in the enterprise. HIE'S STRATEGY In the fourth quarter of 1997, HIE redefined its strategic direction as The Integration Solutions Company focused on providing software tools and services to achieve the enterprise-wide integration of information. Prior to making this shift in strategic direction, the Company sold and distributed certain proprietary and third-party clinical workstation tools including, among others, the Clinical Assessment and Support System ("CASS"), Document Image Management, Workflow Management, Intranet and Internet Workflow Management, Teleradiology Computer Systems and Clinical Image Management. While the Company plans to complete its contractual development efforts for its proprietary CASS software tool, HIE no longer actively sells and distributes the software tools listed in the preceding sentence, since such tools are outside the scope of the Company's redefined strategic direction referred to above. Consequently, HIE wrote off certain third-party and internally developed software, related project costs and accounts receivable and other costs totaling approximately $4.7 million during the fourth quarter of 1997. See Note 1(k) of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. HIE's strategy is to develop leading-edge integration software tools for use, either with or without HIE's assistance, in a variety of vertical industry channels, such as healthcare, banking and financial services. In addition, HIE will continue to offer integration software tool-related and other integration services to its customers. SOFTWARE TOOLS AND SERVICES HIE provides the software tools and services for the integration of the multiple hardware and application software components comprising an information system for an enterprise to achieve the enterprise-wide integration of information. HIE does not sell either hardware, such as personal computers or monitors, or application software, such as general accounting systems or pharmacy 3 4 systems. HIE strives to protect, rather than replace, its customers' investment in hardware and software, while helping them obtain mission-critical information to operate the enterprise. The integration software tools and integration services offered by the Company are listed and explained below: INTEGRATION SOFTWARE TOOLS INTEGRATION SERVICES Cloverleaf(R) Education EMerge(TM) Consulting Criterion(TM) Project Management ExpresSuite(TM) Information Integration Technology-driven Re-design Software Maintenance Implementation Expert-Sourcing INTEGRATION SOFTWARE TOOLS HIE provides the following user-friendly, open-architecture integration software tools that are designed to fulfill complementary system integration functions for an enterprise. Cloverleaf Integration Engine. The Cloverleaf integration engine provides a solution for replacing individual system-to-system interfaces within an enterprise. Cloverleaf has the capability of connecting message streams and data structures from disparate systems both locally and over wide area networks. It facilitates data interchange by connecting different applications and hardware together via an open architecture concept involving standard protocols. This interface, integration and migration tool routes and reformats data, changes communications protocols and combines and explodes messages to keep network systems synchronized. The integration engine improves the accuracy, delivery, availability and recoverability of information through the following advantages: information pooling of all system data; integration and communication of binary, x-ray, digital and other sources of data; and security defined on a per connection basis with multiple-level audit trails for any or all transactions. Cloverleaf reduces ongoing support costs with a graphical user interface that allows users to easily design their own integration interfaces. EMerge Enterprise Master Person Index. Each information system with people-specific information within an enterprise typically has its own master person index ("MPI") as a key to information contained in that system's database. EMerge integrates MPIs of multiple disparate information systems by establishing an enterprise-wide shared MPI so that a system user within an enterprise can request information from or link to information in these disparate information systems. Emerge is a cross-referenced index which can be used as a foundation for an enterprise-wide data repository or warehouse and has the following advantages: duplicate record detection and resolution functions; remote system indexing and data location information to link disparate systems; management of demographic information; support of customer-defined event history; and scaleable distributed architecture to support large enterprises. EMerge was also designed to 4 5 improve data access time and ensure accurate linkages of information stored in disparate information systems and to be both vendor and interface engine independent. Criterion Enterprise Management Tool Set. The Company's enterprise management software tools access data that exist in a variety of databases within an enterprise to provide consolidated mission-critical information as the basis for more comprehensive analysis. With such enterprise-wide consolidated information, customers can better analyze and understand key relationships between the various dimensions of their business, especially operational and financial performance. The Company's enterprise management tools include the following: Criterion Information Management Tools. With the Criterion Information Management Tool Set, an enterprise can access operational, financial and other data stored in a variety of databases across the enterprise, and consolidate identified mission-critical information into a business data model which reflects the key information requirements of the various business disciplines. The Criterion tool set manages (i) the complex task of consolidating data from the source systems, (ii) the mapping and transformation of data into the customer's business data model, and (iii) the changes to the business data model as the customer's information needs change. The Criterion Information Management Tool Set manages the consolidation of a variety of enterprise data, including operational, financial and other data from disparate systems to one point of access. CHS licenses its information management technology from Fiserv CIR, Inc. See "Licenses and Distribution Agreements." Criterion Report Center. The Criterion Report Center, a sophisticated workstation tool, provides customers with the ability to analyze and report on mission-critical information in the way that they want it presented. Through advanced scheduling and distribution capabilities, the Criterion Report Center can fully automate analysis and report production and then route the results to key information users to most effectively deploy information throughout the enterprise on a timely basis. These capabilities can satisfy individual information needs without requiring that every individual be capable of running a workstation. For example, as enterprises broadly implement workstation technology, the Criterion Report Center can automatically complete the feedback loop necessary for improving operational performance by providing the customer with information necessary to assess key operating results relative to predetermined standards of performance. Criterion Survey Engine. The Criterion Survey Engine was developed as a data collection tool to enable the enterprise to collect direct feedback about customer satisfaction. Other information can be collected directly from customers using the Criterion Survey Engine, such as their opinions on matters that could influence the enterprise's strategic planning. Additionally, opinion information from other sources such as customer prospects or employees can be captured using this tool set. The data collected automatically populates the business data model with important data that are not generally being collected at the present time. This information is valuable feedback to an enterprise and an increasingly important factor in the measurement of its performance, the determination of corrective action and planning for the enterprise's future. ExpresSuite. The ExpresSuite of software tools performs such complex system integration functions as single sign-on, single view, screen animation and security. 5 6 Express Single Sign-On. Express Single Sign-On allows a user to log on to disparate information systems from a single dumb terminal or a personal computer. In addition to eliminating unnecessary hardware, Express Single Sign-On saves a user the time of logging into the multiple security systems of the disparate systems. Express Single-View. Express Single-View is designed to be a technician's integration software tool that enables him to make information interactively accessible from and/or inputted to disparate information systems from a single workstation as if the disparate systems were one system. Express Single-View is in development and is scheduled for release during the second half of 1998. Screen Animation. The Company presently markets the Compass screen animator while the Express Screen Animator is being developed. The Express Screen Animator is scheduled for release during the second half of 1998. The Compass screen animator facilitates data interchange with legacy information systems which do not use standard protocols. It connects systems by reading data streams as they come from the mainframe and automatically translates the character-based information into a graphical interface. The features of Compass include easy configuration using point-and-click methods; support of data storage and retrieval in a variety of relational data models through storage-independent libraries; and an application programming interface for original equipment manufacture development of new user applications which inter-operate with other applications. The Compass screen animator technology is licensed from ICS (Sales) Ltd. See "Licenses and Distribution Agreements." Express Security. The Express Security integration software tool is designed both to facilitate authorized access to disparate information systems, which typically have their own security features, and to prohibit unauthorized access to all or specific information within disparate information systems. Express Security is in development and is scheduled for release during the second half of 1998. INTEGRATION SERVICES HIE believes that each customer's needs will vary according to its existing technology infrastructure and its internal capacity for handling system integration issues. As of December 31, 1997, the Company employed 54 people in services. HIE's skilled information technology specialists perform a variety of system integration services ranging from "do-it-yourself" education to "do-it-for-you" expert-sourcing with a variety of forms of integration assistance in between these extremes. Education. HIE's integration software tools are designed to be used by its customers with little or no ongoing HIE assistance. Toward that end, HIE offers a broad curricula regarding HIE integration software tool utilization and other system integration topics at regularly-scheduled intervals for varied skill levels to enable its customers to "go it alone" if they so desire. Consulting. In today's complex enterprise-wide information systems environment, many of HIE's customers engage HIE to help them determine their information systems strategy. HIE's information system design consultants help customers assess their information needs and then 6 7 develop a strategy for obtaining that information in a cost-effective and efficient manner using their existing disparate information systems, either with or without further assistance from HIE. Project Management. Information system implementations are complex undertakings. HIE's project managers have years of implementation experience with a variety of hardware and software vendors. HIE provides this experienced leadership to both vendors and enterprises to meet the challenges of implementing and integrating a system into the enterprise-wide information network. Information Integration. Data may be stored in disparate systems located throughout the enterprise. HIE's integration specialists design and implement automated solutions to convert data from these disparate information systems into point-of-decision information required to operate the enterprise. Technology-driven Re-design. To maximize the potential benefits to be derived from technology, the processes being automated may require alteration. HIE believes that automation and process improvement go hand-in-hand. HIE's integration specialists help ensure that the manual and automated processes for functions within an enterprise are optimized to provide cost-effective, timely information. Software Maintenance. In conjunction with the sale of its proprietary integration software tools, HIE offers its customers 24-hour a day, 365-days a year telephone support to help the customer effectively and efficiently utilize the Company's integration software tools. In addition, HIE fixes software bugs and provides periodic integration software tool enhancements under its standard software maintenance agreements with its customers. Implementation. HIE offers implementation services for both its proprietary as well as third-party integration software tools. Depending on the availability of skilled internal resources, customers typically rely partially or completely upon HIE to implement their purchased integration software tools. In addition, once implemented, customers may subsequently engage HIE to implement a software upgrade or a complex systems interface. Expert-Sourcing. Some customers prefer to have HIE assume partial or complete responsibility for their system integration needs. In these cases, HIE typically enters into a multiple-year engagement for one or more of its integration specialists to provide up to 24-hours a day, 365-days a year integration support, either with or without HIE's integration software tools. SALES AND MARKETING The Company sells its integration software tools and integration services through both a direct sales force and third-party distributors. As of December 31, 1997, the Company has 29 sales and marketing personnel, of whom 19 are direct sales personnel. Two of the 19 direct sales personnel focus primarily on establishing and maintaining third-party distributor relationships for the sale of the Company's integration software tools. Three of the 19 direct sales personnel focus primarily on selling integration services to existing customers. The remaining 14 of the 19 direct sales personnel focus primarily on selling both integration software tools and integration services to new 7 8 accounts. All of the direct sales personnel are paid a base salary plus commissions at escalating rates based on sales volume and sales timing bonuses. Third-party distributors of the Company's integration software tools include, among others, original equipment manufacturers, system integrators and application software vendors. For example, the Cloverleaf integration engine is distributed by International Business Machines Corporation, Science Applications International Corporation, Triple P Management B.V. and others. The Company intends to aggressively pursue the expansion of its distribution channels by adding additional select third-party channel partners with complementary software tool, product and service offerings, including, among others, original equipment manufacturers, systems integration companies, other application software vendors and consulting firms, each of whom may serve one or more industries, including healthcare, banking, financial services and others. Approximately 88% of HIE's revenue is generated within the United States. The Company intends to continue to pursue international sales opportunities in select countries. For example, the Company has established a distribution network in German-speaking countries for one or more of its software tools with several healthcare information system vendors, including Data-Plan Software GmbH, debis Systemhaus SFI GmbH, Gesellschaft Fuer Systemforschung und Dienstleistungen im Gesundheitswesen GmbH, and Triple P Management B.V., in addition to other distributors with worldwide distribution rights, such as IDX Corporation, International Business Machines Corporation and Science Applications International Corporation. RESEARCH AND DEVELOPMENT HIE's research and development effort is an ongoing process of working with customers, prospects and market analysts to identify and address the present and future system integration needs of the enterprise. The Company anticipates that it will address those identified information needs through joint development activities with customers, internal development activities or acquired technology, depending on such factors as customer resource availability, the number of high priority needs, the number and type of technical skills required and market timing considerations. As of December 31, 1997, the Company employed 34 people in research and development. The Company spent approximately $1.6 million, $1.6 million and $1.9 million on research and development for the years ended December 31, 1997, 1996 and 1995, respectively. The Company has developed internally the following integration software tools: the Cloverleaf Integration Engine, the Criterion Console, the Criterion Survey Engine and the ExpresSuite of software tools. EMerge was designed internally, but programmed for HIE's exclusive use by a third party. HIE licenses the exclusive use of the Criterion Information Management Tools within the healthcare industry from a third party. The Company believes that an open computing architecture gives maximum freedom to the user in customizing information systems to meet the specific needs of the enterprise. This freedom fits the Company's strategy in several ways. First, the Company's integration software tools allow customers to leverage their existing investment in information technology resources by connecting different legacy information systems together via an open architecture concept involving standard protocols. Second, the ability to link legacy systems with other applications 8 9 through the Company's integration software tools enables customers to make gradual system upgrades which avoids major capital commitments and related internal review and approval complications. This ability also allows customers to pursue best-of-breed information system strategies. Finally, the Company has minimized the dependence of its integration software tools on any one third-party vendor by using industry standard open architecture such as the UNIX and NT operating systems and SQL databases. The Company intends to continue to develop new integration software tools in an open architecture format that relies on an object-oriented programming approach for speed of development. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company currently relies solely on common law copyrights and trade secrets for proprietary protection of its integration software tools. Although HIE does not currently have patent protection with respect to any aspect of its integration software tools, the Company does have patent applications pending for some of its integration software tools. In the absence of meaningful intellectual property protection, such as patents, the Company may be vulnerable to competitors who could lawfully attempt to copy the Company's integration software tools. Moreover, without patents on the integration software tools, there can be no assurance that other competitors may not independently develop the same or similar technology. The Company routinely applies for trade and service mark protection as appropriate. The Company is dependent upon third-party suppliers to license to it necessary technology that is incorporated into certain of the Company's integration software tools. The Company has less control over the scheduling and quality of work of third-party suppliers than its employees. Furthermore, the Company's agreements to license certain third-party technology will terminate after specified dates unless renewed. To the extent possible, the Company has determined that the third-party intellectual property used in its software tools is public domain or used in accordance with licensed terms, including the license terms of freeware used in its tools. However, while HIE believes that it has all rights necessary to market and sell its solutions without infringement of intellectual proprietary rights held by others, the Company typically has not filtered third-party software through a clean room procedure and it has not conducted a formal infringement search so that there can be no assurance that such conflicting rights do not exist. There can be no assurance that such use is in compliance with such licenses or that the Company will not become the subject of infringement claims or legal proceedings by third parties with respect to current or future integration software tools and that such claims or proceedings will not have a material adverse effect on the Company's business, financial condition or results of operations. An adverse outcome in litigation or similar adversarial proceedings could subject the Company to significant liabilities to third parties, require expenditure of significant resources to develop non-infringing technology, require disputed rights to be licensed from others or require the Company to cease the marketing or use of certain software tools, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. As the number of integration software tools in the industry increases and the functionality of these integration software tools further overlaps, the Company believes that software developers may become increasingly subject to infringement claims. To the extent the Company wishes or is required to obtain licenses to patents or proprietary rights of others, there can be no assurance that any such licenses will be made available on terms acceptable to the Company, or at all. 9 10 ORGANIZATIONAL STRUCTURE HIE has three wholly-owned subsidiaries (HCI, IHS and CHS), whose operations were combined with the parent Company, HIE, under a functional organization structure, i.e., sales, service, research and development and finance, effective November 21, 1997. Prior to that time, each subsidiary operated as an independent, but interrelated, entity referred to by the Company as an Entrepreneurial Business Unit ("EBU"). The Company changed to the present organizational structure in an attempt to be more responsive to the marketplace and to streamline operations. The Company believes that the current organizational structure will expand the depth and breadth of its integration software tool distribution capability, improve the productivity of its integration software tool development efforts, enhance the efficiency and effectiveness of its customer service operations and eliminate duplicate effort throughout the organization. The original investment in each EBU other than IHS was made by Healthdyne, which was the sole shareholder of the Company until the Spin-Off. Since Healthdyne transferred its interest in the EBUs to HIE prior to the Spin-Off, the following summary of the Company's current investment in and relationship with the various EBUs refers to HIE rather than Healthdyne. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" regarding HIE's relationship with DataView Imaging International, Inc. ("DataView"), a former EBU. HCI. The Company initially acquired a 44% equity ownership interest in HCI, a provider of integration engine software and related services located in Dallas, Texas, in October 1994; increased its interest to 57% effective January 1, 1995; and finally increased its interest to 100%, making HCI a wholly-owned subsidiary of HIE, effective December 31, 1995. IHS. IHS, a provider of enterprise master person index and other software tools and various integration services, is an internally developed, wholly-owned subsidiary of the Company located in Marietta, Georgia and has been in existence since May 30, 1995. CHS. In October 1994, the Company committed to make certain loans to CHS, a provider of enterprise management software tools and related services located in Nashville, Tennessee, with such loans being convertible into a 64% equity ownership interest in CHS. During 1995, Massey Burch Capital Corp. ("Massey Burch") agreed to share equally HIE's funding commitment to CHS in exchange for half of HIE's potential equity ownership interest in CHS. In December 1996, HIE acquired an option (the "Option") to purchase Massey Burch's potential equity ownership interest in CHS. In June 1997, the existing and potential equity ownership interests of various parties in CHS were restructured and all equity ownership interests in CHS held by persons other than HIE and Massey Burch were canceled in exchange for the grant of options to purchase 199,100 shares of HIE common stock to CHS executive management and other employees at the fair value on the date of grant. On December 31, 1997, HIE exercised the Option to acquire Massey Burch's 50% equity ownership interest in CHS, bringing HIE's equity ownership interest in CHS to 100% in exchange for 416,666 shares of HIE common stock and a warrant to purchase 50,000 shares of HIE common stock for $1.59 per share exercisable through December 2003. 10 11 LICENSES AND DISTRIBUTION AGREEMENTS On May 25, 1995, HIE entered into a Corporation Reseller Agreement with InterTech Imaging Corporation ("InterTech"), under which the Company has made a $500,000 license prepayment. The agreement grants HIE the non-exclusive right to distribute InterTech's DocuPACT software world-wide in the healthcare market and a right of first refusal on any proposed InterTech healthcare-related exclusive joint venture or exclusive healthcare licensing agreement with a third party. The agreement is automatically renewed each May 25th unless terminated by either party upon sixty days written notice. Prior to the Company's change in strategic direction in the fourth quarter of 1997, HIE sold the DocuPACT software as a part of its document imaging tools. HIE no longer actively sells the DocuPACT software. See " -- HIE's Strategy." On September 12, 1995, HCI entered into a Technology License Agreement with ICS (Sales) Ltd ("ICS"), under which the Company paid $400,000 upon delivery of source code and documentation. This agreement was assignable to HIE in conjunction with the acquisition of HCI by HIE. HCI has an 18 month exclusive, nontransferable license to market and sell ICS software in the healthcare market in Canada, the United States and Mexico. HCI also has a five year non-exclusive, nontransferable license elsewhere in the world, excluding the healthcare market in the United Kingdom, to enter into sub-licenses with respect to ICS products. A version of the ICS TALK software has been modified by HCI to operate in conjunction with the Cloverleaf integration engine and is marketed and licensed by HCI as its Compass screen animator. As a result of HIE's change in strategic direction in the fourth quarter of 1997, HIE no longer actively sells the Compass screen animator as a stand-alone software tool. See "Integration Software Tools." On October 13, 1995, CHS entered into a Distribution Agreement with Fiserv CIR, Inc. ("Fiserv"), which grants perpetual exclusive rights to CHS throughout the world to market, distribute and license an information system application owned by Fiserv currently known as InformEnt to end users and through distributors in the healthcare industry. The agreement defines the term "healthcare industry" as entities that provide healthcare medical services to patients including, but not limited to, hospitals, physicians, managed care organizations, integrated delivery networks, federal, state and local government health services agencies, associations whose membership is predominately healthcare professionals, home healthcare companies, insurance companies and federal, state and local governments. CHS's exclusive rights over all countries except the U.S. shall be automatically revoked in the event CHS does not establish a written licensing agreement with at least one international entity by December 31, 1999. CHS must pay Fiserv the greater of (i) 6% of revenues from end users for Fiserv's software or (ii) base license fees of $300,000, $240,000, $400,000 and $560,000 for 1995 through 1998, respectively. The annual base license fee for each year beginning 1999 shall be $560,000. CHS may elect to terminate the agreement after December 31, 1999 upon six months prior written notice and payment of $280,000 plus any outstanding amounts due pursuant to the agreement. Said distribution agreement is automatically and irrevocably assigned to HIE in the event of the failure of CHS to pay the license fees when due to Fiserv. The Fiserv software is incorporated into the Criterion Information Management Tools. As a result of HIE's acquisition of a 100% interest in CHS on December 31, 1997, HIE has requested Fiserv's consent to the 11 12 assignment of the agreement by CHS to HIE. HIE believes that Fiserv will consent to that assignment. See "Integration Software Tools." On June 12, 1996, HIE entered into a ten-year agreement with DataView which grants to the Company a perpetual, royalty-free, non-exclusive, non-transferable, worldwide license to use DataView's clinical image management software in the Company's service business to the extent that said use does not directly compete with one of DataView's products. In addition to its royalty-free distribution rights status, the Company has a Most Favored Nations pricing status with respect to the teleradiology and the Mini-PACS product fees. HIE no longer actively sells or distributes DataView's products. See "--HIE's Strategy." CUSTOMERS The "enterprise" is HIE's target customer. An enterprise is either a single entity with multiple departments or multiple entities that are joined together to fulfill a common mission. For example, a hospital, which has laboratory, radiology, pharmacy and other departments, is an enterprise, and an integrated healthcare delivery network, which consists of hospitals, clinics, imaging centers, physicians, home health care providers, management service organizations, employers, payers and others, is also an enterprise. No single customer accounted for more than 10% of the Company's revenue in either 1997 or 1995. One customer accounted for approximately 25% of the Company's revenue in 1996. No single distributor provided customers to the Company that accounted for more than 10% of the Company's revenue in either 1997 or 1996. One distributor provided customers to the Company that accounted for approximately 18% of the Company's revenue in 1995. HIE has granted approximately 650 licenses for the use of its software integration tools. HIE has provided integration services to approximately 450 customers. BACKLOG The Company has contracts for the delivery of certain integration software tools and services, generally within 12 months of the contract dates, totaling approximately $6.9 million and $7.5 million as of December 31, 1997 and 1996, respectively. COMPETITION The Company faces competition from a variety of sources depending on the types of integration software tools and/or integration services being offered as the integration solution to a particular customer's problem. The Company competes with, among others, (i) integration engine companies, such as Software Technologies Corporation ("STC"), Century Analysis Incorporated ("CAI") and HUBLink, Inc. ("HUBLink"); (ii) companies offering enterprise master person index solutions, such as ActaMed, Oacis Healthcare, Cerner Corporation, STC, CAI and HUBLink; (iii) middleware software tool companies, such as New Era of Networks, Inc., TSI International Software, Ltd., STC, CAI and HUBLink; (iv) consulting firms, such as Superior Consultant Holdings Corporation, First Consulting and Ernst & Young LLP; (v) systems integration firms, such as Science Applications International Corporation and Daou Systems, Inc.; (vi) original equipment manufacturers, such as International Business Machines Corporation; and (vii) internal MIS departments of the enterprise. A competitor of the Company 12 13 with respect to one aspect of the Company's business may serve as a distributor for the Company with respect to other integration software tools or integration services. In general, the Company's competitors have greater financial, technical, research and development and marketing resources and more extensive business experience than the Company. Although the Company believes that its solutions have advantages over competing tools and services currently being marketed, there can be no assurance that the Company will be able to continue to compete effectively in the marketplace if its present and potential competitors are able to duplicate or improve upon its tools, services or marketing strategy. GOVERNMENT REGULATION The United States Food and Drug Administration (the "FDA") has issued a draft guidance document addressing the regulation of certain computer products as medical devices under the Federal Food, Drug and Cosmetic Act (the "FDC Act"). To the extent that computer software is a medical device under the policy, the manufacturers of such products could be required, depending on the product, to: (i) register and list their products with the FDA; (ii) notify the FDA and demonstrate substantial equivalence to other products on the market before marketing such products; or (iii) obtain FDA approval by filing a premarket application that establishes the safety and effectiveness of the product. The Company expects that the FDA is likely to become increasingly active in regulating computer software that is intended for use in healthcare settings. The FDA, if it chooses to regulate such software, can impose extensive requirements governing pre- and post-market conditions such as device investigation, approval, labeling and manufacturing. In addition, such products would be subject to the FDC Act's general controls, including those relating to good manufacturing practices and adverse experience reporting. The confidentiality of patient records and the circumstances under which such records may be released for inclusion in the Company's databases are subject to substantial regulation by state and federal governments. These laws and regulations govern both the disclosure and the use of confidential patient medical record information. Although compliance with these laws and regulations is at present principally the responsibility of the hospital, physician or other health care provider, regulations governing patient confidentiality rights are evolving rapidly. Additional legislation governing the dissemination of medical record information has been proposed at both the state and federal levels. This legislation may require holders of such information to implement security measures that may require substantial expenditures by the Company. There can be no assurance that changes to state or federal laws will not materially restrict the ability of health care providers to submit information from patient records using the Company's software tools. EMPLOYEES As of December 31, 1997, HIE employed 127 persons. Of these employees, 29 were engaged in sales and marketing, 54 in services, 34 in research and development and 10 in general and administrative functions. None of these employees is represented by a labor union or subject to any collective bargaining agreement, nor has the Company experienced any work stoppages. The Company believes that its relations with its employees are good. 13 14 FACTORS AFFECTING FUTURE PERFORMANCE In addition to other information in this Report, the following factors should be considered in evaluating the Company's historical operating results, current financial condition and business. Lack of Profitability and Accumulated Deficit. With the exception of 1996, the Company has generally sustained operating losses since its incorporation. The Company reported net earnings of $1.2 million in 1996, but incurred net losses of $6.2 million, $10.0 million and $1.3 million in 1997, 1995 and for the period from June 15, 1994 (date of incorporation) through December 31, 1994, respectively. As of December 31, 1997, the Company had an accumulated deficit of $16.2 million. No assurance can be given that the Company will ever generate significant revenue or sustain or again achieve profitability. Certain of the Company's integration software tools are in the early stages of market acceptance. To sustain profitable operations, the Company must successfully market its current and prospective integration software tools and expand sales of its integration software tools and integration services in healthcare and other industries, such as banking and financial services. No assurance can be given that such efforts will be successful. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, Item 7 of this Annual Report on Form 10-K. Dependence on Single Integration Software Tool. Approximately 32% of the Company's revenue in 1997 was derived from a single integration software tool, the Cloverleaf integration engine. For at least the near-term, the Company will continue to be largely dependent on the sales of this integration software tool. A downturn in the market for the Cloverleaf integration engine would likely have a material adverse effect on the Company's revenue and net earnings. The success of the Company will continue to depend in part on its ability to diversify its revenue base. There can be no assurance that the Company will be successful in its diversification efforts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, Item 7 of this Annual Report on Form 10-K. Fluctuations in Quarterly Operating Results and Seasonality. Results of operations have fluctuated and may continue to fluctuate significantly from quarter to quarter as a result of a number of factors, including, among others (i) contract terms and the volume and timing of system sales and customer acceptance; (ii) customer purchasing patterns, order cancellations and rescheduling of system installations; (iii) the mix of direct and indirect sales; (iv) the mix of higher-margin software revenue and lower-margin services revenue; (v) the actions of competitors; and (vi) the timing of acquisitions and divestitures. Accordingly, the Company's future operating results are likely to be subject to significant variability from quarter to quarter and could be adversely affected in any particular quarter. The Company's total revenue and results of operations may also be affected by seasonal trends including the possibility of higher revenue in the Company's fourth quarter and lower revenue in the first three quarters, in particular the first quarter, as a result of many customers' annual purchasing and budgetary practices and the Company's sales commission practices which rely in part on annual quotas. As a result, the Company believes that period-to-period comparisons of its revenue and results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance. Due to the foregoing factors, it is possible that the Company's operating results 14 15 will be below the expectations of public market analysts and investors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, Item 7 of this Annual Report on Form 10-K. Uncertainty of Market Acceptance. The Company's success will depend in large part on the acceptance of the Company's integration software tools and integration services as partial or complete solutions to an enterprise's system integration problems by the chief information executive and technical users within an enterprise. There can be no assurance that the Company's integration software tools and integration services will achieve the market acceptance necessary for profitable operations. New Products and Technological Changes. The market for the Company's integration software tools and integration services is characterized by continued and rapid technological advances in software development requiring ongoing expenditures for research and development and the timely introduction of new integration software tools and integration services. In addition, compatibility with existing and emerging industry standards is essential to the Company's marketing strategy and research and development efforts. The establishment of standards is largely a function of user acceptance, and standards are therefore subject to change. The Company's integration software tools are dependent upon a number of advanced technologies, including those relating to computer hardware and software, storage devices and other peripheral components, all of which are subject to rapid change. Accordingly, the Company's future success will depend upon its ability on a timely basis to develop and introduce new integration software tools and enhance its existing integration software tools in order to keep pace with competitive offerings, adapt to technological developments and changing industry standards and provide additional functionality to address the increasingly sophisticated needs of its customers. To the extent, the Company determines that new technologies and equipment are required to remain competitive, the acquisition and implementation of such technologies and equipment are likely to require investment of significant time and capital. Depending on the complexity of a given integration software tool, the Company's development and introduction cycle could last months or years. There can be no assurance that the Company will be successful in developing, introducing on a timely basis, and marketing such integration software tools or enhancements thereof or that they will be accepted by the market. Research and development expense totaled $1.6 million, $1.6 million and $1.9 million in 1997, 1996 and 1995, respectively. There can be no assurance that the necessary capital will be available in the future or that the integration software tools will become or remain commercially viable. In addition, there can be no assurance that the Company's future development efforts will be successful or that the emergence of new technologies, industry standards or customer requirements will not render the Company's technology, equipment or processes obsolete or uncompetitive. Further, there can be no assurance that the Company will be able to acquire or license the needed new technology at a price or on terms acceptable to the Company. Finally, without the timely development and successful introduction of market-driven integration software tools, there can be no assurance that the Company can either achieve and sustain profitable operations or continue operations. Proprietary Technology and Dependence on Third-Party Technology. The Company's success is dependent to a significant extent on its ability to maintain the proprietary and confidential software incorporated in its integration software tools as they are released. Although the Company currently relies on a combination of copyright and trade secret and contractual protections to 15 16 establish and protect its proprietary rights, the Company does have patent applications pending for some of its integration software tools and plans to pursue patents on the software tools that qualify for such protection as the Company deems necessary to protect its intellectual property. However, without patent protection, there can be no assurance that the legal protections and the precautions taken by the Company will be adequate to prevent misappropriation of the Company's technology or trade secrets, or that these protections and precautions will prevent independent third-party development of competitive technology and integration software tools. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. The Company is dependent upon third-party suppliers to license to it necessary technology that is incorporated into certain of the Company's integration software tools. The Company has less control over the scheduling and quality of work of third-party suppliers than its own employees. Furthermore, the Company's agreements to license certain third-party technology will terminate after specified dates unless renewed. To the extent possible, the Company has determined that the third-party intellectual property used in its integration software tools is in the public domain or used in accordance with licensed terms, including the license terms of freeware used in its integration software tools. However, while HIE believes that it has all rights necessary to market and sell its solutions without infringement of intellectual proprietary rights held by others, the Company typically uses freeware and shareware as is and has not conducted a formal infringement search. Accordingly, there can be no assurance that such conflicting rights do not exist. There can be no assurance that such use is in compliance with such licenses or that the Company will not become the subject of infringement claims or legal proceedings by third parties with respect to current or future software tools and that such claims or proceedings will not have a material adverse effect on the Company's business, financial condition or results of operations. An adverse outcome in litigation or similar adversarial proceedings could subject the Company to significant liabilities to third parties, require expenditure of significant resources to develop non-infringing technology, require disputed rights to be licensed from others or require the Company to cease the marketing or use of certain software tools, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. As the number of integration software tools in the industry increases and the functionality of these integration software tools further overlaps, the Company believes that software developers may become increasingly subject to infringement claims. To the extent that the Company wishes or is required to obtain licenses to patents or proprietary rights of others, there can be no assurance that any such licenses will be made available on terms acceptable to the Company, or at all. See "Business -- Intellectual Property and Property Rights." Reliance on Distributors and Customer Concentration. Approximately 20%, 20% and 25% of the Company's total revenue in 1997, 1996 and 1995, respectively, were generated by third-party distributors of the Company's integration software tools. No single distributor provided customers to the Company that accounted for more than 10% of the Company's revenue in either 1997 or 1996, but one distributor provided customers to the Company that accounted for approximately 18% of the Company's total revenue in 1995. The loss of a significant distributor could have a material adverse effect on the Company's business, financial condition and results of operations. No single customer accounted for more than 10% of the Company's revenue in either 1997 or 1995, but one customer accounted for approximately 25% of the Company's revenue in 1996. The loss of a significant customer could have a material adverse effect on the Company's business, financial condition and results of operations. 16 17 Risks Associated with International Sales. While approximately 88% of HIE's revenue is generated within the United States, HIE has customers in 18 countries and five continents. International sales in certain foreign markets are subject to a variety of risks, including difficulties in establishing and managing international distribution channels, localizing software tools for sales in foreign markets and enforcing intellectual property rights, as well as fluctuations in the value of foreign currencies, changes in duties and quotas, introduction of tariff or non-tariff barriers and economic, political and regulatory changes. In addition, to the extent profit is generated or losses are incurred in foreign countries, the Company's effective income tax rate may be materially adversely affected. The Company currently does not engaged in hedging transactions, but may do so in the future. There can be no assurance that any of the factors described above will not have a material adverse effect on the Company's business, operating results and financial condition. Liability for Errors and Omissions. The Company's integration software tools are used to provide information that relates to healthcare enterprise operations and other critical applications. In addition, use of the Company's integration software tools could also potentially jeopardize the security and privacy of confidential patient and other information and data stored in the Company's integration software tools and in the computer systems of the Company's customers. Any failure by the Company's integration software tools to provide accurate and timely information or to protect the security and privacy of confidential patient and other information could result in claims against the Company. The Company maintains errors and omissions insurance to protect against claims associated with the use of its integration software tools, but there can be no assurance that its insurance coverage would adequately cover any claims asserted against the Company. A successful claim brought against the Company could have a material adverse effect on the Company. Even unsuccessful claims could result in the Company's expenditure of funds in litigation and management time and resources. There can be no assurance that the Company will not be subject to claims alleging errors and omissions in integration software tool development and operation, that such claims will not result in liability in excess of its insurance coverage, that the Company's insurance will cover such claims or that appropriate or adequate insurance will continue to be available to the Company in the future at commercially reasonable rates. Competition. The Company faces competition from a variety of sources depending on the types of integration software tools and/or integration services being offered as the integration solution to a particular customer's problem. The Company competes with, among others, (i) integration engine companies, such as Software Technologies Corporation ("STC"), Century Analysis Incorporated ("CAI") and HUBLink, Inc. ("HUBLink"); (ii) companies offering enterprise master person index solutions, such as ActaMed, Oacis Healthcare, Cerner Corporation, STC, CAI and HUBLink; (iii) middleware software tool companies, such as New Era of Networks, Inc., TSI International Software, Ltd., STC, CAI and HUBLink; (iv) consulting firms, such as Superior Consultant Holdings Corporation, First Consulting and Ernst & Young LLP; (v) systems integration firms, such as Science Applications International Corporation and Daou Systems, Inc.; (vi) original equipment manufacturers, such as International Business Machines Corporation; and (vii) internal MIS departments of the enterprise. A competitor of the Company with respect to one aspect of the Company's business may serve as a distributor for the Company with respect to other integration software tools or integration services. 17 18 In general, the Company's competitors have greater financial, technical, research and development and marketing resources and more extensive business experience than the Company. Although the Company believes that its solutions have advantages over competing tools and services currently being marketed, there can be no assurance that the Company will be able to continue to compete effectively in the marketplace if its present and potential competitors are able to duplicate or improve upon its tools, services or marketing strategy. Uncertain Ability to Manage Growth. The Company has experienced periods of rapid growth in 1995 and 1996 that has placed, and could continue to place, a significant strain on the Company's financial, management and other resources. The Company's future performance will depend in part on its ability to manage change in its operations, including integration of any acquired businesses and any internally developed businesses. In addition, the Company's ability to manage its growth effectively will require it to continue to improve its operational and financial control systems and infrastructure, and to attract, train, motivate, manage and retain key employees. If the Company's management were to become unable to manage growth effectively, the Company's business, financial condition and results of operations could be materially adversely affected. Risks Associated with Possible Acquisitions. The Company intends to pursue acquisitions as part of its growth strategy. The Company has no present commitments or agreements with respect to any acquisition. The Company anticipates, however, that one or more potential acquisition opportunities may become available in the future. Acquisitions would require investment of operational and financial resources and could require integration of dissimilar operations, assimilation of new employees, diversion of management resources, increases in administrative costs and additional costs associated with debt or equity financing. If attractive acquisition opportunities become available, the Company intends to pursue them actively. There can be no assurance that the Company will complete any acquisition or that a future acquisition will not have a material adverse effect on the Company. Consolidation and Uncertainty in the Healthcare Industry. Many healthcare providers are consolidating to create larger healthcare enterprises with greater regional market power. Such consolidation could erode the Company's existing customer base and reduce the size of the Company's target market. In addition, the resulting enterprises could have a greater bargaining power, which may lead to price erosion or the Company's integration software tools and integration services. The reduction in the size of the Company's target market or the failure of the Company to maintain adequate price levels could have a material adverse effect on the Company. The healthcare industry also is subject to changing political, economic and regulatory influences that may affect the procurement practices and operation of healthcare industry participants. During the past several years, the U.S. healthcare industry has been subject to increased governmental regulation and reform proposals. These reforms may increase governmental involvement in healthcare, lower reimbursement rates and otherwise change the operating environment for the Company's customers. Healthcare industry participants may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments, including those for the Company's integration software tools and integration services. The failure of the Company to maintain adequate price levels or sales as a result of legislative or market-driven reforms could have a material adverse effect on the Company's business, results of operations and financial condition. 18 19 Dependence on Key Personnel. The loss of the services of Robert I. Murrie, the Company's President and Chief Executive Officer, or certain other key personnel could have a material adverse effect on the Company. In addition, the Company believes that its future success will be dependent in part on its continued ability to recruit, motivate and retain qualified personnel. The Company faces competition for such personnel from other companies and organizations. The Company's anticipated growth and expansion into areas and activities requiring additional expertise will require the addition of new management personnel and the development of additional expertise by existing management personnel. The failure to attract and retain such personnel or to develop such expertise could adversely affect the Company's business. Possible Adverse Effects of Government Regulation. The United States Food and Drug Administration (the "FDA") has issued a draft guidance document addressing the regulation of certain computer products as medical devices under the Federal Food, Drug and Cosmetic Act (the "FDC Act"). To the extent that computer software is a medical device under the policy, the manufacturers of such products could be required, depending on the product, to: (i) register and list their products with the FDA; (ii) notify the FDA and demonstrate substantial equivalence to other products on the market before marketing such products; or (iii) obtain FDA approval by filing a pre-market application that establishes the safety and effectiveness of the product. The Company expects that the FDA is likely to become increasingly active in regulating computer software that is intended for use in healthcare settings. The FDA, if it chooses to regulate such software, can impose extensive requirements governing pre- and post-market conditions such as device investigation, approval, labeling and manufacturing. In addition, such products would be subject to the FDC Act's general controls, including those relating to good manufacturing practices and adverse experience reporting. The confidentiality of patient records and the circumstances under which such records may be released for inclusion in the Company's databases are subject to substantial regulation by state and federal governments. These laws and regulations govern both the disclosure and the use of confidential patient medical record information. Although compliance with these laws and regulations is at present principally the responsibility of the hospital, physician or other health care provider, regulations governing patient confidentiality rights are evolving rapidly. Additional legislation governing the dissemination of medical record information has been proposed at both the state and federal levels. This legislation may require holders of such information to implement security measures that may require substantial expenditures by the Company. There can be no assurance that changes to state or federal laws will not materially restrict the ability of health care providers to submit information from patient records using the Company's software tools. Future Capital Needs and Uncertainty of Additional Funding. The Company financed its operations from inception through the November 1995 Spin-Off primarily through equity investments totaling $22.0 million by Healthdyne. Following the Spin-Off, Healthdyne had no obligation or intention to make additional advances or equity infusions in the Company. Accordingly, during November 1996, the Company sold 2.75 million shares of its common stock and received proceeds of $10.3 million, after deducting all offering-related expenses. During November 1996, April 1997 and September 1997, the Company used $800,000, $400,000 and $200,000 of cash, respectively, to prepay a portion of long-term debt at a discount. The 19 20 Company also invested $995,000 during 1997 to satisfy its funding commitment to CHS. The Company is using the remainder of the net proceeds of the 1996 offering to pay debt, of which $3.3 million was paid on January 2, 1998, and for working capital and general corporate purposes. The Company believes that current available cash and anticipated cash flow from operating activities will be sufficient to meet the Company's capital requirements for at least the next twelve months and for the foreseeable future. In the future, the Company may require additional financing to fund its operations. The Company's future capital requirements will depend on many factors, including the progress of the Company's research and development, the market acceptance of any of the Company's integration software tools, competitive products and the establishment of third-party licensing arrangements. Any additional equity financing may result in dilution to the Company's shareholders and debt financing is likely to subject the Company to financial and other covenants. There can be no assurance that funds will be available on favorable terms, if at all. The absence of such financing would have a material adverse effect on the Company's business, including a possible reduction or cessation of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, Item 7 of this Annual Report on Form 10-K. Possible Volatility of Stock Price. The stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. In addition, factors such as announcements of technological innovations or the introduction of new products by the Company or its competitors, market conditions in the healthcare and other industries and general economic conditions may have a significant effect on the market price of the Company's common stock. Certain Anti-Takeover Considerations. Certain provisions of the Company's Articles of Incorporation and By-Laws, as well as the Company's Shareholder Rights Plan (see Note 8 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K), could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of HIE common stock. Certain of such provisions will allow the Company to issue preferred stock with rights senior to those of HIE common stock and to impose various procedural and other requirements which could make it more difficult for shareholders to effect certain corporate actions. Risks Associated with Forward-Looking Statements. This Annual Report on Form 10-K, including the information incorporated by reference herein, contains various forward-looking statements and information that are based on the Company's beliefs and assumptions, as well as information currently available to the Company. From time to time, the Company and its officers, directors or employees may make other oral or written statements (including statements in press releases or other announcements) which contain forward-looking statements and information. Without limiting the generality of the foregoing, the words "believe," "anticipate," "estimate," "expect," "intend," "plan," "seek" and similar expressions, when used in this Form 10-K and in such other statements, are intended to identify forward-looking statements. All forward-looking statements and information in this Form 10-K are forward-looking statements within the meaning 20 21 of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act and are intended to be covered by the safe harbors created thereby. Such forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to differ materially from historical results or from any results expressed or implied by such forward-looking statements. Such factors include, without limitation, those discussed above. Many of such factors are beyond the Company's ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. The Company disclaims any obligation to update or review any forward-looking statements contained in this Report or in any statement referencing the factors affecting future performance and other cautionary statements set forth in this report, whether as a result of new information, future events or otherwise. 21 22 ITEM 2. PROPERTIES The Company conducts its operations from the following leased facilities and does not own any such facilities:
APPROXIMATE APPROXIMATE LEASE SQUARE MONTHLY TERMINATION LOCATION FEET RENT DATE 1850 Parkway Place Suite 1100 Marietta, GA 30067 9,315 $16,123 February, 2003 15301 Dallas Parkway Suites 770, 950 and 1360 Dallas, TX 75248 12,797 $19,945 November, 2000 214 Second Avenue, North Suite 200 Nashville, TN 37201 3,238 $ 3,778 November, 1998
The Company believes that its facilities are adequate through the above-indicated lease expiration periods. ITEM 3. LEGAL PROCEEDINGS As of the date hereof, there are no material legal proceedings pending against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 1997. 22 23 EXECUTIVE OFFICERS OF THE COMPANY The following sets forth certain information with respect to the executive officers of the Company.
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- Robert I. Murrie 52 President, Chief Executive Officer and Director George T. Schwend 50 Senior Vice President, Sales and Marketing Carolyn R. Jolley 48 Senior Vice President, Client Services James L. Oakes, Jr. 51 Senior Vice President, Integration Services James Morrison 43 Senior Vice President, Research and Development Joseph G. Bleser 52 Executive Vice President, Chief Financial Officer, Treasurer and Secretary Cheryl N. Blanco 32 Vice President - Controller, Chief Accounting Officer, Assistant Treasurer and Assistant Secretary
The executive officers of the Company are elected annually and serve at the pleasure of the Board of Directors. Robert I. Murrie has served as a Director and the President and Chief Executive Officer of the Company since October 21, 1997. Mr. Murrie joined the Company in January 1996 as a Client Partner (a senior sales executive position) and most recently served as President of HCI from April 1997 until October 20, 1997. Prior to joining HIE, Murrie served as President and Chief Executive Officer of Nurse on Call, a managed care service company, from 1992 to December 1995 and held several senior executive positions at HBO & Company ("HBOC"), a publicly-traded, international healthcare information systems and services provider, from 1985 to 1992, including President and Chief Executive Officer of Healthquest, Inc., a wholly-owned subsidiary of HBOC, from 1988 to 1992. George T. Schwend has served as Senior Vice President, Sales and Marketing of the Company since December 16, 1997 and as a Vice President of the Company from October 27, 1997 until December 15, 1997. Mr. Schwend joined the Company when the Company acquired HCI, where Mr. Schwend served as Chief Operating Officer from April 1993 until October 26, 1997. Prior to joining HCI, Mr. Schwend served as President of InfoScience, Inc., a technology consulting firm during 1992 until March 1993. Carolyn R. Jolley has served as Senior Vice President, Client Services of the Company since December 16, 1997 and as Vice President of the Company from October 27, 1997 until 23 24 December 15, 1997. Ms. Jolley joined the Company when the Company acquired HCI, where Ms. Jolley served as Vice President, Client Services since May 1993. Prior to joining HCI, Ms. Jolley was an account executive for Shared Financial Systems, Inc., an integration engine company serving the banking industry, from September 1990 until April 1993. James L. Oakes, Jr. has served as Senior Vice President, Integration Services of the Company since December 16, 1997 and as Vice President of the Company from October 27, 1997 until December 15, 1997. Mr. Oakes joined the Company as a Client Partner (a senior sales executive position) in April 1996. Prior to joining HIE, he was Chief Operating Officer for APACHE Medical Systems, Inc., a publicly-traded, outcomes management company, having served in that capacity since 1994. From 1993 to 1994, Mr. Oakes was President and Chief Operating Officer of International Health Services, a contract staffing company, and from 1991 to 1993 he was Vice President, Sales and Marketing for InterPractice Systems, a software development company. James Morrison has served as Senior Vice President, Research and Development of the Company since December 16, 1997 and as Vice President of the Company from October 27, 1997 until December 15, 1997. Mr. Morrison joined the Company in February 1995 and was appointed as President of IHS in May 1995. From 1981 until joining IHS, Mr. Morrison served in a variety of executive operational and staff capacities at both the regional and corporate levels at HBOC, with his last positions being Vice President of Strategic Development and Vice President of Research and Development. Joseph G. Bleser has served as a Director and Executive Vice President of the Company since October 21, 1997, as Chief Financial Officer of the Company since March 20, 1995 and as Treasurer and Secretary of the Company since August 10, 1995. Mr. Bleser served as Vice President - Finance of the Company from August 10, 1995 until October 20, 1997. Prior to joining the Company, Mr. Bleser served as Executive Vice President, Chief Financial Officer and Treasurer of Allegiant Physician Services, Inc., a publicly-traded, physician practice management company, from May 1993 until March 17, 1995. He was previously employed by HBOC as Senior Vice President-Finance, Treasurer, Assistant Secretary and Chief Financial Officer from 1992 to 1993 and as Vice President, Controller and Chief Accounting Officer from 1983 to 1992. Cheryl N. Blanco has served as Vice President - Controller and Assistant Treasurer of the Company since December 16, 1997, as Controller of the Company from October 27, 1997 until December 15, 1997 and as Chief Accounting Officer and Assistant Secretary of the Company since October 27, 1997. Ms. Blanco joined the Company in February 1997 as Controller of IHS. Prior to joining IHS, Ms. Blanco served as a Division Controller for Medaphis Corporation, a publicly-traded, healthcare business services company, from 1992 to 1997. 24 25 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been quoted and traded under the symbol "HDIE" in the over-the-counter market on the OTC Bulletin Board from November 7, 1995 to May 22, 1996, on the Nasdaq SmallCap Market from May 23, 1996 to October 29, 1996 and on the Nasdaq National Market since October 30, 1996. The low and high sales prices of the Common Stock for each quarter during 1997 and 1996 are shown in the table below. The approximate number of holders of record of the Company's Common Stock at March 18, 1998 was 2,030. HIE Stock Price Per Share Information:
1997 1996 ---- ---- QUARTER LOW HIGH LOW HIGH ------- ----- ----- ---- ----- First $3.63 $6.25 $1.88 $4.31 Second $2.25 $3.75 $3.50 $7.75 Third $2.19 $3.50 $3.50 $5.88 Fourth $1.38 $3.13 $3.50 $6.00
The Company has never paid any cash dividends with respect to its Common Stock and does not anticipate paying cash dividends in the foreseeable future. The Company currently intends to retain all earnings, if any, for use in the expansion of the Company's business. The payment of dividends, if any, in the future with respect to the Company's Common Stock is within the discretion of the Board of Directors and will depend on the Company's earnings, capital requirements, financial condition and other relevant factors. On December 31, 1997, the Company issued 416,666 shares of Common Stock in connection with the exercise of an option to acquire the 50% equity ownership interest in CHS held by The Southern Venture Fund II, L.P. ("SVFII"). In connection with the Option exercise, HIE amended the warrant to purchase 50,000 shares of the Company's Common Stock which HIE had previously issued to SVFII to change the per share warrant exercise price from $4.5625 to the average of the closing prices of the Common Stock as quoted on the Nasdaq National Market for the five trading days prior to December 31, 1997, or approximately $1.59. These transactions were exempt from registration under the Securities Act by reason of Section 4(2) thereof as private transactions by an issuer not involving any public offering. 25 26 ITEM 6. SELECTED FINANCIAL DATA The selected financial data is presented below for the years ended December 31, 1997, 1996 and 1995 and for the period from June 15, 1994 (date of incorporation) through December 31, 1994. The data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information contained herein.
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- FOR THE PERIOD FROM 6/15/94 (DATE OF SOURCE OF INCORPORATION SELECTED DATA 1997 1996 1995 TO 12/31/94 ---- ---- ---- ----------- (Amounts in thousands, except for per share data) STATEMENTS OF OPERATIONS: Revenue $15,552 $16,151 $ 8,700 $ 153 Operating earnings (loss) $ 194* $ 1,486 $(3,618)* $(1,270) Net earnings (loss) $ 230* $ 1,183 $(4,648)* $(1,265) Diluted net earnings (loss) per share $ 0.01* $ 0.06 $ (0.30)* $ (0.08) Shares used in the calculation of diluted net earnings (loss) per share 20,336 18,876 15,653 15,500
* Excludes non-recurring pre-tax and after-tax charges of $6.4 million and $5.3 million, or $0.31 and $0.34 net loss per share, in 1997 and 1995, respectively (see Notes 1 and 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K).
AS OF DECEMBER 31, -------------------------------------------------------------------------------- 1997 1996 1995 1994 ---- ---- ---- ---- (Amounts in thousands) BALANCE SHEETS: Total assets $28,008 $31,802 $21,734 $9,974 Working capital $ 5,322 $12,385 $ 2,743 $ (56) Long-term obligations $ 540 $ 4,265 $ 5,549 -- Shareholders' equity $18,092 $22,956 $10,929 $9,737
26 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain of the statements made in this Item 7 and in other portions of this Report and in documents incorporated by reference herein constitute forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. Such forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to differ materially from historical results or from any results expressed or implied by such forward-looking statements. Such factors include, without limitation, those discussed in "Business -- Factors Affecting Future Performance" herein. See "Business -- Factors Affecting Future Performance -- Risks Associated with Forward-Looking Statements." Overview Healthdyne Information Enterprises, Inc. ("HIE" or the "Company") was incorporated in Georgia on June 15, 1994 and was a wholly-owned subsidiary of Healthdyne, Inc. ("Healthdyne") until November 6, 1995, at which time Healthdyne distributed all of the outstanding shares of HIE to Healthdyne's shareholders (the "Spin-Off"). HIE's common stock is publicly traded on the Nasdaq National Market under the symbol "HDIE." The Company provides software tools and services to achieve the enterprise-wide integration of information. The Company generates revenue from licensing integration software tools and providing integration services, such as education, consulting, project management, information integration, technology-driven re-design, software maintenance, implementation and expert-sourcing. Software licenses are generally granted on a perpetual basis for a one-time, up-front fee. A standard per-student amount is charged for education classes. Consulting services are generally provided for a fixed fee based on estimated hours of service to be provided at standard hourly rates. Project management, information integration, technology-driven re-design and implementation fees are generally based on actual hours of service at standard hourly rates. Software maintenance agreements are generally one-year renewable service contracts for a prepaid standard fee. Expert-sourcing agreements are generally multiple-year renewable service contracts for a negotiated monthly fee. On June 12, 1996, the Company entered into an agreement effective April 1, 1996, with a former majority-owned subsidiary, DataView Imaging International, Inc. ("DataView"), that provided for a restructuring of the relationship between HIE and DataView, as discussed in Note 3 of Notes to Consolidated Financial Statements included in the accompanying HIE Consolidated Financial Statements. Subsequent to March 31, 1996, DataView's financial position, results of operations and cash flows are no longer included in HIE's Consolidated Financial Statements due to immateriality. In October 1997, in conjunction with a change in executive management, the Company redefined its strategic direction as The Integration Solutions Company. Certain assets totaling $4.7 million that no longer contributed to the Company's redefined strategic direction were 27 28 written-off or fully reserved. In addition, the operations of the Company's three operating subsidiaries (Healthcare Communications, Inc. ("HCI"), Integrated Healthcare Solutions, Inc. ("IHS") and Criterion Health Strategies, Inc. ("CHS")) were combined with those of the parent Company under a functional organization structure, i.e. sales, service, research and development and finance. See Note 1 of Notes to Consolidated Financial Statements. On December 31, 1997, the Company exercised its option to acquire the remaining 50% ownership interest of CHS. CHS licenses the Criterion data integration software tool and provides project management, information integration and technology-driven re-design services. Since HIE did not have a majority ownership interest in CHS in 1997 and prior years, the operating results of CHS were not consolidated with the Company's consolidated operating results. HIE's share of CHS' operating results are presented as Losses of Affiliate in the accompanying Consolidated Statements of Operations. In addition, the Company's acquisition of the remaining ownership interest in CHS during 1997 referred to above resulted in the $1.7 million purchased in-process research and development expense reflected in the accompanying Consolidated Statements of Operations. See Notes 1 and 3 of Notes to Consolidated Financial Statements included in the accompanying HIE Consolidated Financial Statements. The Company is aware of the potential issues associated with the programming code in existing computer systems as the year 2000 approaches. The primary issue is whether or not computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause the system to fail. Management does not anticipate that the Company will incur either significant operating expenses or significant capital expenditures to be year 2000 compliant with respect to both its internal systems and the software tools that it markets. In fact, the Company's software tools and services could be utilized by HIE's customers and prospects to enable their systems to become year 2000 compliant. The Company expects the following external factors to affect the market for integration software tools and integration services in future years: (1) the continued consolidation of enterprises within various industries to achieve economies of scale; (2) the growing importance of information for the survival and prosperity of various enterprises; (3) the increasing complexity of information technology; and (4) the year 2000 issue referred to above. Software revenue is generally recognized upon shipment in accordance with Statement of Position 91-1, Software Revenue Recognition. Service revenue is recognized as the work is performed or, in the case of a fixed-fee contract, on the percentage of completion basis, even though some services are prepaid. On October 27, 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"), which is effective in 1998. The Company expects adoption of SOP 97-2 to have no material effect on future HIE consolidated financial statements. The Company's Consolidated Balance Sheets include assets designated as purchased software and capitalized software development costs. Purchased software includes the cost of purchased integration software tools and the cost of software acquired in connection with 28 29 business combinations. It also includes the cost of licenses to use, embed and sell software tools developed by others. Certain costs of HIE proprietary software developed internally are capitalized in accordance with generally accepted accounting principles. The costs of individual software tools are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis over not more than five years, whichever method results in a higher level of annual amortization. The excess of cost over net assets of businesses acquired (goodwill) is being amortized over a period of fifteen years. At each balance sheet date, the Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. 29 30 Results of Operations The following table sets forth both the Company's total revenue and the percentage of total revenue (unless otherwise indicated) for each component included in the Company's Consolidated Statements of Operations for the years indicated:
Years ended December 31, 1997 1996 1995 ------- ------- ------ Total HIE revenue (in 000's) $15,552 $16,151 $8,700 ------- ------- ------ Revenue: Software 44% 44% 59% Services 56% 56% 41% ------- ------- ------ Total revenue 100% 100% 100% ------- ------- ------ Cost of revenue Software (as a % of software revenue) 15% 13% 10% Services (as a % of services revenue) 56% 53% 58% Total cost of revenue 38% 35% 30% ------- ------- ------ Gross profit 62% 65% 70% ------- ------- ------ Operating expenses: Sales and marketing 24% 22% 40% Research and development 10% 10% 22% General and administrative 27% 24% 50% ------- ------- ------ Total operating expenses(1) 61% 56% 112% ------- ------- ------ Operating earnings (loss)(1) 1% 9% (42%) Losses of affiliate (1)% 0% (13%) Minority interest 0% 0% 2% Interest income (expense), net 1% (2%) (2%) ------- ------- ------ Earnings (loss) before taxes(1) 1% 7% (55%) Income tax benefit 0% 0% 2% ------- ------- ------ Net earnings (loss)(1) 1% 7% (53%) ------- ------- ------
(1) Excludes non-recurring pre-tax and after-tax charges of $6.4 million and $5.3 million in 1997 and 1995, respectively. See Notes 1 and 3 of Notes to Consolidated Financial Statements included in the accompanying HIE Consolidated Financial Statements. 30 31 Comparison of Years ended December 31, 1997 and 1996 Revenue. Total revenue was $15.6 million in 1997 compared to $16.2 million in 1996, a decrease of 4%. The decrease of $396,000, or 6%, in software revenue was primarily due to a reduction in Cloverleaf integration engine software license fee revenue. The decrease of $203,000, or 2%, in services revenue was due primarily to a drop in service personnel productivity at the beginning of 1997 offset somewhat by increased software maintenance revenue. The Company reported steadily improving revenue during each quarter of 1997 for both software and services revenue. Management believes that the decrease in revenue between 1996 and 1997 was neither a general marketplace nor a Company software or service issue, but was primarily due to a Company distribution problem that management sought to address throughout the year by increasing the size of the direct sales force and the number of distributors. HIE more than doubled its sales force and added 17 new distributors during the latter part of 1997. Cost of revenue. The cost of revenue was $5.9 million in 1997 compared to $5.7 million in 1996, an increase of 4%. The increase in cost of revenue from 35% to 38% of revenue between 1996 and 1997 is primarily attributable to the Company sub-licensing more third-party imaging, workflow and internet software tools in 1997 than it did during 1996, as well as a relatively low level of service personnel productivity at the beginning of 1997. Third-party software tools typically have a higher relative cost than the Company's proprietary software tools, such as the Cloverleaf integration engine and the EMerge enterprise master person index software tool. Service personnel staffing was appropriately reduced in April 1997 and productivity improved thereafter. Gross profit. The Company's gross profit was $9.6 million in 1997 compared to $10.5 million in 1996, a decrease of 8%, due primarily to the revenue decrease discussed above. Gross profit as a percent of revenue decreased from 65% in 1996 to 62% in 1997 primarily due to the higher cost of third-party software tools and reduced levels of service personnel productivity also discussed above. Sales and marketing. Sales and marketing expense was $3.6 million in 1997 and $3.5 million in 1996, an increase of 3%, due primarily to the increase in sales personnel costs, sales commissions and travel expenses associated with the increased sales staffing referred to above. Research and development. Research and development expense was $1.6 million in both 1997 and 1996, but cash expenditures for research and development decreased by $287,000, or 12%, in 1997 due to fewer resources being devoted to the Clinical Assessment and Support System ("CASS") software tool in 1997 compared to 1996. The Company capitalized internally developed software costs of $467,000 and $789,000 in 1997 and 1996, respectively. General and administrative. General and administrative expense was approximately $4.2 million in 1997 compared to $3.9 million in 1996, an increase of 8%. The increase of $303,000 between the two periods was primarily due to an increase of $242,000 in the allowance for doubtful accounts. 31 32 Losses of affiliate. Losses of affiliate, which represents the Company's share of the losses of CHS arising from HIE's funding commitment to CHS, totaled $151,000 in 1997. Since HIE entered into an agreement with a third party during December 1995 that provided for a sharing of HIE's funding commitment to CHS, HIE did not incur any losses of affiliate in 1996. Interest income(expense), net. Net interest income was $187,000 in 1997 compared to net interest expense of $303,000 in 1996, due primarily to (1) interest income resulting from the Company's public offering of 2.75 million shares of its Common Stock during November 1996 and (2) decreased interest expense related to various payments of long-term debt and related accrued interest. Income tax benefit. The Company has no provision for income taxes in 1997 and 1996 due to the net loss incurred in 1997 and the utilization of available net operating loss carryforward benefits in 1996. Comparison of Years ended December 31, 1996 and 1995 Revenue. Total revenue was $16.2 million in 1996 compared to $8.7 million in 1995, an increase of 86% even though DataView's revenue was no longer included in the Company's consolidated revenue effective April 1, 1996 as discussed above. The mix of revenue shifted to more service revenue than software revenue between 1995 and 1996. Even though software revenue declined as a percent of total revenue in 1996, it still increased 40% between 1995 and 1996 due primarily to the continued growth of integration engine license fee revenue supplemented by software license fee revenue from the CASS and the EMerge software tools, both of which were released for general availability to the market during the second half of 1996. Services revenue grew 152% in 1996 due to the continued growth in software maintenance, implementation and education services related to the integration engine software tool and, more significantly, the demand by enterprises for system design, implementation and integration services of the imaging, workflow, internet, EMerge and CASS software tools. Cost of revenue. The cost of revenue was $5.7 million in 1996 compared to $2.6 million in 1995, an increase of 117%, substantially all of which is related to the growth in revenue. The increase in cost of revenue from 30% to 35% of revenue between 1995 and 1996 is primarily attributable to the shift in revenue mix toward services revenue, which typically has a higher cost of revenue than software revenue. The increase in cost of software revenue as a percent of software revenue is due to the Company sub-licensing more third-party imaging, workflow and internet software tools in 1996 than it did during 1995. Third-party software tools typically have a higher relative cost than the Company's proprietary software tools, such as the Cloverleaf integration engine, EMerge and CASS. The decrease in cost of services revenue as a percent of services revenue is due to productivity improvements as the Company's relatively new service organization matured during the year. Gross profit. The Company's gross profit was $10.5 million in 1996 compared to $6.1 million in 1995, an increase of 72%, due primarily to the revenue growth discussed above. Gross profit as a percent of revenue decreased from 70% in 1995 to 65% in 1996. The revenue mix 32 33 shifted from 59% software revenue and 41% services revenue in 1995 to 44% software revenue and 56% services revenue in 1996. The main reason for the shift was the increase in system design, implementation and integration services. As discussed above, while software revenue, which has relatively high gross profit margins, increased 40%, services revenue, which normally has lower gross profit margins than software, increased 152% between 1995 and 1996. Sales and marketing. Sales and marketing expense was $3.5 million in 1996 and $3.4 million in 1995, an increase of 2%. This slight increase of $70,000 in 1996 is due primarily to the net effect of increased sales personnel costs, sales commissions and travel expenses associated with increased sales staffing and the increase in revenue, offset somewhat by the exclusion of DataView from the Company's consolidated operating results for the last three quarters of 1996 as discussed above and secondarily to utilization of a more cost-effective international distribution network in 1996. Sales and marketing expense as a percent of revenue decreased from 40% in 1995 to 22% in 1996, reflecting the increased productivity of the Company's internal sales force and its distributors. Research and development. Research and development expense was $1.6 million in 1996 compared to $1.9 million in 1995, a decrease of 18%, due primarily to the capitalization of internally developed software costs totaling $789,000, which represented 33% of research and development expenditures in 1996, and secondarily to the exclusion of DataView from the Company's consolidated operating results for the last three quarters of 1996. No costs of internally developed software qualified for capitalization under generally accepted accounting principles in 1995. General and administrative. General and administrative expense was approximately $3.9 million in 1996 compared to $4.3 million in 1995, a decrease of 10%. The decrease of $425,000 between the two years was primarily due to the net effect of (1) decreased staffing, outside service expense and other administrative costs at the Dallas office resulting from cost control measures initiated during the fourth quarter of 1995 and the first quarter of 1996 and (2) the exclusion of DataView from the Company's consolidated operating results for the last three quarters of 1996 as discussed above, both somewhat offset by (a) increased goodwill amortization related primarily to the step acquisition of a subsidiary during 1995; (b) identifiable expenses of being a new public company; and (c) increased administrative staffing costs to support current and projected growth of the Marietta-based operations. Losses of affiliate. Losses of affiliate, which resulted from the Company's commitment to fund CHS, totaled $1.1 million in 1995. Because HIE entered into an agreement with a third party during December 1995 that provided for a sharing of HIE's funding commitment to CHS, HIE did not incur any losses of affiliate in 1996. Minority interest. The minority interest in net loss of subsidiary totaling $142,000 in 1995 is no longer applicable in 1996 as a result of HIE's increased ownership interest in said subsidiary to 100%, effective December 31, 1995. Interest expense, net. Net interest expense was $303,000 in 1996 compared to $168,000 in 1995, an increase of 80%, due primarily to the net effect of (1) increased interest expense 33 34 associated with acquisition financing and (2) reduced interest expense under a financing agreement renegotiated at a lower interest rate effective January 1, 1996. Income tax benefit. The Company has no provision for income taxes in 1996 due to the utilization of available net operating loss carryforward benefits. The income tax benefit of $140,000 in 1995 relates to a subsidiary which filed a separate income tax return prior to HIE increasing its ownership interest in said subsidiary to 100% effective December 31, 1995. Liquidity and Capital Resources The Company financed its operations from inception through the November 1995 Spin-Off primarily through equity investments totaling $22.0 million by Healthdyne. Following the Spin-Off, Healthdyne had no obligation or intention to make additional advances or equity infusions in the Company. Accordingly, during November 1996, the Company sold 2.75 million shares of its common stock and received proceeds of $10.3 million, after deducting all offering-related expenses. During November 1996, April 1997 and September 1997, the Company used $800,000, $400,000 and $200,000 of cash, respectively, to prepay a portion of long-term debt at a discount. The Company also invested $995,000 during 1997 to satisfy its funding commitment to CHS. The Company is using the remainder of the net proceeds of the 1996 offering to pay debt and for working capital and general corporate purposes. The Company's present financial condition and its plans for future working capital and other capital requirements are further discussed below. The Company has working capital of $5.3 million at December 31, 1997 compared to $12.4 million at December 31, 1996. Approximately $4.0 million of the decrease in working capital is due to the balance sheet classification of debt maturing on January 2, 1998. In addition, cash decreased $3.0 million between 1996 and 1997 for the reasons discussed below. Net cash provided by operating activities decreased $2.9 million between 1996 and 1997 due primarily to the net loss reported in 1997 compared to the net earnings reported in 1996 and the timing of payments of both accounts payable and accrued liabilities. Net cash used in investing activities decreased $648,000 between 1996 and 1997 due primarily to the net effect of (1) a reduction of $1.6 million in purchased and capitalized software development costs related primarily to a reduction in EMerge and CASS development efforts and (2) a decrease in capital expenditures of $241,000 as the Company leased more equipment in 1997 than during 1996, both somewhat offset by an increase of $1.2 million in other non-current assets and liabilities, net related primarily to HIE's funding commitment to CHS in 1997 prior to HIE's acquisition of the remaining ownership interest in CHS on December 31, 1997. Net cash provided by financing activities decreased $7.5 million between 1996 and 1997 due primarily to the public stock offering in 1996 referred to above and secondarily to the decrease in payments for maturing or prepaid long-term debt previously discussed. The proceeds from equity transactions include the net proceeds of $10.3 million from the Company's secondary public stock offering in 1996 and relatively insignificant proceeds from the exercise of employee stock options in both 1997 and 1996. 34 35 As of December 31, 1997, the Company had $3.5 million of debt financing maturing over the next twelve months, of which $3.3 million matured and was paid on January 2, 1998. During August 1997, the Company renewed its line of credit with a bank and also increased the credit line from $1 million to $2 million on essentially the same terms and conditions as the expiring line of credit. The Company plans to maintain the $2 million line of credit for unanticipated needs and financial flexibility. Based on its current business plan and business model projections, the Company believes that current available cash and anticipated cash flow from operating activities will be sufficient to meet the Company's capital requirements for at least the next twelve months and for the foreseeable future. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements of the Company and its subsidiaries and independent auditors' report thereon are included as pages F-1 through F-19 of this Annual Report on Form 10-K:
Page Independent Auditors' Report.................................................... F-1 Consolidated Balance Sheets - December 31, 1997 and 1996........................ F-2 Consolidated Statements of Operations - Years Ended December 31, 1997, 1996 and 1995............................................. F-3 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1997, 1996 and 1995................................. F-4 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995............................................. F-5 Notes to Consolidated Financial Statements...................................... F-7
35 36 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Healthdyne Information Enterprises, Inc.: We have audited the accompanying consolidated balance sheets of Healthdyne Information Enterprises, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Healthdyne Information Enterprises, Inc. and subsidiaries at December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Atlanta, Georgia January 23, 1998 F-1 37 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except per share amounts)
December 31, ----------------------- Assets 1997 1996 ------ ---- ---- Current assets: Cash and cash equivalents (note 10) $ 7,732 $ 10,743 Trade accounts receivable, less allowances of $407 and $165 at December 31, 1997 and 1996, respectively (note 1(d)) 5,628 5,260 Other current assets 1,338 963 -------- -------- Total current assets 14,698 16,966 Notes receivable 335 333 Purchased software, net of accumulated amortization of $778 and $770 at December 31, 1997 and 1996, respectively (notes 1(e) and 1(k)) 2,397 3,587 Capitalized software development costs, net of accumulated amortization of $122 and $39 at December 31, 1997 and 1996, respectively (notes 1(f) and 1(k)) 564 750 Property and equipment, net (note 4) 1,474 1,221 Excess of cost over net assets of businesses acquired, less accumulated amortization of $1,939 and $1,267 at December 31, 1997 and 1996, respectively (note 3) 8,503 8,836 Other assets 37 109 -------- -------- $ 28,008 $ 31,802 ======== ======== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Current installments of long-term debt and obligations under capital leases (notes 6 and 10) $ 3,501 $ 163 Accounts payable, principally trade 536 1,019 Accrued liabilities (notes 5 and 11) 2,673 981 Deferred service revenue 2,666 2,418 -------- -------- Total current liabilities 9,376 4,581 Long-term debt and obligations under capital leases, excluding current installments (notes 6 and 10) 260 4,265 Other liabilities (note 11) 280 -- -------- -------- Total liabilities 9,916 8,846 -------- -------- Shareholders' equity (note 8): Preferred stock, without par value Authorized 20,000 shares; designated Series A cumulative preferred stock 500 shares; issued none -- -- Common stock, $ .01 par value. Authorized 50,000 shares; issued and outstanding 20,863 and 20,172 shares at December 31, 1997 and 1996, respectively 209 202 Additional paid-in capital 34,114 32,819 Accumulated deficit (16,231) (10,065) -------- -------- Total shareholders' equity 18,092 22,956 Commitments (notes 9 and 11) -------- -------- $ 28,008 $ 31,802 ======== ========
See accompanying Notes to Consolidated Financial Statements. F-2 38 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except per share amounts)
Years ended December 31, ---------------------------------- 1997 1996 1995 ---- ---- ---- Revenue (note 12): Software $ 6,773 $ 7,169 $ 5,136 Services 8,779 8,982 3,564 -------- -------- -------- Total revenue 15,552 16,151 8,700 -------- -------- -------- Cost of revenue: Software 1,026 907 536 Services 4,882 4,765 2,082 -------- -------- -------- Total cost of revenue 5,908 5,672 2,618 -------- -------- -------- Gross profit 9,644 10,479 6,082 Operating expenses: Sales and marketing 3,624 3,505 3,435 Research and development 1,611 1,576 1,928 General and administrative (including related party expenses of $13, $51 and $325 for the respective periods) (note 2) 4,215 3,912 4,337 Obsolete software and other write-offs (note 1(k)) 4,650 -- -- Purchased in-process research and development (note 3) 1,746 -- 3,605 Goodwill impairment and investment option reserve (note 3) -- -- 1,730 -------- -------- -------- Operating earnings (loss) (6,202) 1,486 (8,953) Losses of affiliate (note 3) (151) -- (1,144) Minority interest in net loss of subsidiary -- -- 142 Interest expense (310) (552) (303) Interest income 497 249 135 -------- -------- -------- Earnings (loss) before income taxes (6,166) 1,183 (10,123) Income tax benefit (note 7) -- -- 140 -------- -------- -------- Net earnings (loss) $ (6,166) $ 1,183 $ (9,983) ======== ======== ======== Net earnings (loss) per share of common stock (note 1(m)): Basic $ (.30) $ .07 $ (.64) ======== ======== ======== Diluted $ (.30) $ .06 $ (.64) ======== ======== ======== Shares used in the calculation of net earnings (loss) per share of common stock (note 1(m)): Basic 20,336 17,481 15,653 ======== ======== ======== Diluted 20,336 18,876 15,653 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. F-3 39 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In thousands)
Additional Total Common stock paid-in Accumulated shareholders' Shares Amount capital deficit equity ------ ------ ------- ------- ------ Balance, December 31, 1994 15,500 $155 $10,847 $ (1,265) $ 9,737 Issuance of common stock 615 6 (6) -- -- Stock options exercised 388 4 130 -- 134 Capital contribution -- -- 11,041 -- 11,041 Net loss -- -- -- (9,983) (9,983) ------ ---- ------- -------- ------- Balance, December 31, 1995 16,503 165 22,012 (11,248) 10,929 Issuance of common stock in public offering, net of offering expenses of $634 2,750 28 10,297 -- 10,325 Stock options exercised 905 9 452 -- 461 Employee stock plan purchases 14 -- 58 -- 58 Net earnings -- -- -- 1,183 1,183 ------ ---- ------- -------- ------- Balance, December 31, 1996 20,172 202 32,819 (10,065) 22,956 Issuance of common stock in an acquisition 416 4 1,095 -- 1,099 Stock options exercised 193 2 31 -- 33 Employee stock plan purchases 82 1 169 -- 170 Net loss -- -- -- (6,166) (6,166) ------ ---- ------- -------- ------- Balance, December 31, 1997 20,863 $209 $34,114 $(16,231) $18,092 ====== ==== ======= ======== =======
See accompanying Notes to Consolidated Financial Statements. F-4 40 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands)
Years ended December 31, -------------------------------- 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net earnings (loss) $ (6,166) $ 1,183 $ (9,983) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Obsolete software and other write-offs (note 1(k)) 4,614 -- -- Purchased in-process research and development (note 3) 1,746 -- 3,605 Goodwill impairment (note 3) -- -- 1,430 Investment option reserve (note 3) -- -- 300 Losses of affiliate 151 -- 1,144 Provision for doubtful accounts 242 92 43 Depreciation and amortization 1,652 1,623 1,080 Minority interest in net loss of subsidiary -- -- (142) Increase in trade accounts receivable (1,433) (2,419) (1,454) Increase in other current assets (691) (212) (477) Increase (decrease) in trade accounts payable (712) 531 204 Increase in accrued liabilities 76 687 223 Increase in deferred service revenue 248 1,121 480 -------- -------- -------- Net cash provided by (used in) operating activities (273) 2,606 (3,547) -------- -------- -------- Cash flows from investing activities: Purchased software (445) (1,713) (1,643) Capitalized software development costs (467) (789) -- Capital expenditures (186) (427) (672) Acquisition of businesses, net of cash acquired -- -- (565) Decrease (increase) in other non-current assets and liabilities, net (1,071) 112 (820) -------- -------- -------- Net cash used in investing activities (2,169) (2,817) (3,700) -------- -------- -------- Cash flows before financing activities (2,442) (211) (7,247) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of long-term debt 233 67 559 Principal payments on long-term debt (1,152) (3,970) (410) Proceeds from capital contributions -- -- 10,936 Proceeds from issuances of common stock 350 10,844 134 -------- -------- -------- Net cash provided by (used in) financing activities (569) 6,941 11,219 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (3,011) 6,730 3,972 Cash and cash equivalents at beginning of year 10,743 4,013 41 -------- -------- -------- Cash and cash equivalents at end of year $ 7,732 $ 10,743 $ 4,013 ======== ======== ======== (Continued)
F-5 41 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands)
Years ended December 31, ----------------------------------- 1997 1996 1995 ---- ---- ---- Supplemental disclosures of cash paid for: Interest $ 84 $ 199 $ 289 =========== =========== ====== Income taxes $ -- $ -- $ 140 =========== =========== ====== Supplemental disclosure of noncash investing and financing activities: Equipment acquired under capital lease obligations $ 378 $ 67 $ 160 =========== =========== ====== Equipment contribution received from Healthdyne $ -- $ -- $ 105 =========== =========== ====== Deferred service revenue financed by a note receivable $ -- $ -- $ 417 =========== =========== ====== Obligations incurred in connection with acquisitions (notes 3 and 11) $ 840 $ -- $6,162 =========== =========== ====== Issuance of common stock in connection with an acquisition (note 11) $ 1,099 $ -- $ -- =========== =========== ======
See accompanying Notes to Consolidated Financial Statements. F-6 42 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (In thousands, except per share amounts) (1) Summary of Significant Accounting Policies (a) Business Healthdyne Information Enterprises, Inc. and subsidiaries (collectively referred to as "HIE" or the "Company") provide software tools and services to achieve the enterprise-wide integration of information. HIE was incorporated on June 15, 1994 in the State of Georgia and is headquartered in Marietta, Georgia. HIE was a wholly-owned subsidiary of Healthdyne, Inc. ("Healthdyne") until November 6, 1995 at which time Healthdyne distributed all of the outstanding shares of HIE to the Healthdyne shareholders (the "Spin-Off"). (b) Basis of Financial Statement Presentation The Consolidated Financial Statements include the accounts of the Company and its subsidiaries, as appropriate (see note 3). The Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles. In preparing the Consolidated Financial Statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the Consolidated Balance Sheets and income and expenses for the periods. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated in consolidation. (c) Cash and Cash Equivalents Cash and cash equivalents consist of cash and short-term investments with original maturities of three months or less. (d) Revenue Revenue is derived from the sale of integration software tools and from providing education, consulting, project management, implementation, support and other integration services. Revenue from software licensing and support fees is recognized in accordance with Statement of Position 91-1, Software Revenue Recognition. Software revenue is recognized upon shipment since (i) collectibility of the related accounts receivable is probable, (ii) there are generally no obligations remaining under the related software license agreement after shipment, and (iii) customer acceptance is generally not contractually required. All service revenue is recognized as the work is performed or, in the case of a fixed-fee contract, on the percentage-of-completion basis, even though some services are prepaid. F-7 43 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company established business relationships with several new distributors in 1997 and, therefore, limited historical data is available on which to base estimates of future returns, allowances and warranties. Management of the Company has provided an allowance for expected returns, allowances and warranties based on historical rates. The amounts of returns, allowances and warranties ultimately incurred could differ materially in the near term from the allowances calculated. (e) Purchased Software Purchased software includes the cost of purchased integration software tools and the cost of software acquired in connection with business combinations. It also includes the cost of licenses to use, embed and sell software tools developed by others. These costs are being amortized ratably based on the projected revenue associated with these purchased or licensed tools and products or the straight-line method over five years, whichever method results in a higher level of annual amortization. Amortization expense related to purchased software amounted to $886, $620 and $150 in 1997, 1996 and 1995, respectively (see notes 1(k) and 3). (f) Research and Development and Capitalized Software Development Costs Prior to the determination of technological feasibility for software tools, research and development costs are expensed as incurred. After determination of technological feasibility and before the release of the software tools for general availability, the development costs related to such tools are capitalized. These costs are being amortized ratably based on the projected revenue associated with these tools or the straight-line method over five years, whichever method results in a higher level of annual amortization. The Company capitalized $467 and $789 of software development costs in 1997 and 1996, respectively. There were no capitalized software development costs in 1995. Amortization expense related to capitalized software development costs was $101 and $39 in 1997 and 1996, respectively (see note 1(k)). (g) Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over an estimated useful life of five years. Amortization of leasehold improvements is recorded over the shorter of the lives of the related assets or the lease terms and is included in depreciation expense. (h) Excess of Cost Over Net Assets of Businesses Acquired The excess of cost over net assets of businesses acquired (goodwill) is being amortized using the straight-line method over 15 years. Amortization expense related to acquired businesses amounted to $672, $682 and $708 in 1997, 1996 and 1995, respectively. At each balance sheet date, the Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life F-8 44 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds (see notes 1(k) and 3). (i) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of The Company adopted the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, on January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this statement did not have a material impact on the Company's financial position, results of operations or liquidity. (j) Stock Option Plans Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense to be recognized over the related vesting period would generally be determined on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures required by SFAS 123 (see note 8). (k) Non-recurring Charges The Company incurred the following non-recurring charges during the fourth quarters of 1997 and 1995:
1997 1995 ---- ---- Obsolete software and other write-offs (described below) $ 4,650 $ - Purchased in-process research and development (note 3) 1,746 3,605 Goodwill impairment (note 3) - 1,430 Investment option reserve (note 3) - 300 ------- -------- $ 6,396 $ 5,335 ======= ========
F-9 45 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements During the fourth quarter of 1997, in conjunction with a change in executive management, the Company ceased selling and distributing, and consequently wrote-off, certain third-party and internally developed software, related project costs and accounts receivable, and other costs that no longer contributed to the Company's redefined business direction stated in note 1 (a) above. (l) Income Taxes Prior to the Spin-off, the Company's results of operations were included in the consolidated Federal income tax returns filed by Healthdyne. Under the tax sharing agreement between the Company and Healthdyne, income taxes were recorded by the Company as if it filed separate income tax returns. The Company accounts for income taxes using an asset and liability approach in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under SFAS 109, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Additionally, the effect on deferred taxes of a change in tax rates is recognized in earnings in the period that includes the enactment date. Income tax benefits are not recognized unless ultimate realization of such benefits is reasonably certain. (m) Net Earnings (Loss) Per Share of Common Stock On December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which prescribes the calculation methodology and financial reporting requirements for basic and diluted earnings per share. Basic earnings (loss) per common share available to common shareholders are based on the weighted average number of common shares outstanding. Diluted earnings (loss) per common share available to common shareholders are based on the weighted average number of common shares outstanding and dilutive potential common shares, such as dilutive stock options. All prior period net earnings (loss) data presented in these Consolidated Financial Statements have been restated to conform to the provisions of SFAS 128. (2) Related Party Transactions Matria Healthcare, Inc. ("Matria"), which was formed in a merger involving Healthdyne in March 1996, provides certain legal, tax, data processing, personnel and accounting services to the Company. Amounts charged to the Company related to such services, which have been reflected as general and administrative expenses in the accompanying Consolidated Statements of Operations, were $13, $51 and $325 in 1997, 1996 and 1995, respectively. Charges for services provided by Matria to the Company are generally determined based on estimates of actual time in providing such services to the Company using actual costs without markup. To the extent that charges for such services and for costs incurred by Matria on the Company's behalf are allocations of common expenses, such allocations are based on one or more criteria such as asset or revenue size, relative transaction volume, employee headcounts, facility size and other relevant criteria. The Company believes that such allocation methods result in reasonable approximations of the common expenses related to the Company. F-10 46 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (3) Acquisitions Criterion Health Strategies, Inc. In October 1994, the Company committed to make certain loans to Criterion Health Strategies, Inc. ("CHS") of Nashville, Tennessee, a provider of data management software tools and services, with such loans being convertible into a 64% equity ownership interest in CHS. During December 1995, Massey Burch Capital Corp. ("Massey Burch") agreed to share equally HIE's funding commitment to CHS in exchange for half of HIE's potential equity ownership interest in CHS. In December 1996, HIE acquired an option (the "Option") to purchase Massey Burch's potential equity ownership interest in CHS. In June 1997, the existing and potential equity ownership interests of various parties in CHS were restructured and all equity ownership interests in CHS held by persons other than HIE and Massey Burch were canceled in exchange for the grant of options to purchase 199 shares of HIE common stock to CHS executive management and other employees at the fair value on the date of grant. On December 31, 1997, HIE exercised the Option to acquire Massey Burch's 50% equity ownership interest in CHS, bringing HIE's equity ownership interest in CHS to 100%, in exchange for 416 shares of HIE common stock and a warrant to purchase 50 shares of HIE common stock for $1.59 per share exercisable through December 2003 (see note 11). Prior to HIE's acquisition of the majority interest in CHS, the Company's share of the losses of CHS was netted against notes receivable from CHS and shown as losses of affiliate in the accompanying Consolidated Financial Statements. CHS operations will be included in the Company's Consolidated Financial Statements beginning on January 1, 1998. This acquisition was accounted for using the purchase method of accounting. The acquisition resulted in purchased in-process research and development of $1,746, which was expensed in 1997, purchased software of approximately $715 and additional cost over net assets acquired of approximately $336. The Company also assumed an $840 obligation to a third party for the exclusive use of a software tool in the healthcare industry (see note 11). The following pro forma financial information presents the combined results of operations of HIE and CHS as if the acquisition had occurred as of January 1, 1996, after giving effect to certain adjustments, including the amortization of goodwill and purchased software and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had HIE and CHS constituted a single entity during 1997 and 1996.
Years ended December 31, ------------------------ 1997 1996 ---- ---- Revenue $16,322 $16,580 ======= ======= Net loss $(6,716) $ (304) ======= ======= Diluted net loss per share $ (.32) $ (.02) ======= =======
Healthcare Communications, Inc. During May 1995, the Company purchased a 13% interest in Healthcare Communications, Inc. ("HCI") of Dallas, Texas, a provider of integration engine software, for approximately $3,061 in cash, bringing the Company's total ownership interest in HCI to 57%. The F-11 47 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements acquisition was accounted for using the purchase method of accounting with the results of operations of the business acquired included retroactively from January 1, 1995. The acquisition resulted in cost over net assets acquired of approximately $8,834. Effective December 31, 1995, HIE increased its ownership interest in HCI from 57% to 100% for approximately $6,162 in deferred payments financed by two promissory notes. The first promissory note for approximately $1,100 bore interest at 8% per annum, was secured by HCI's accounts receivable and was paid in full by the Company in April 1996. The original second promissory note was a convertible debenture for approximately $5,062, bearing interest at 6.4% per annum, secured by a portion of HCI common stock, and was due and paid in full on January 2, 1998 after the following prepayments. Principal and accrued interest totaling $1,007, $504 and $223 under this debenture were prepaid at a discount on November 15, 1996, April 30, 1997 and September 15, 1997, respectively (see note 6). The acquisition was accounted for using the purchase method of accounting. The acquisition resulted in purchased in-process research and development of approximately $3,605, which was expensed in 1995, purchased software of approximately $807 and additional cost over net assets acquired of approximately $1,169. DataView Imaging International, Inc. In June 1994, the Company acquired a 61% equity ownership interest and an option to acquire the remaining 39% interest in DataView Imaging International, Inc. ("DataView") of Norcross, Georgia, a provider of clinical image management systems. At the end of 1995, in conjunction with a change in HIE's strategic direction with respect to DataView, the Company incurred non-recurring charges of $1,430 for goodwill impairment and $300 to fully reserve the cost of the option referred to above (see note 1). During 1996, HIE and DataView restructured their relationship whereby, among other things, HIE reduced its equity ownership interest in DataView to 19.5% in return for a $1,061 fully reserved promissory note and HIE limited its funding obligation to DataView to $2,042 (the balance of such funding as of March 31, 1996 evidenced by a fully reserved promissory note). Subsequent to March 31, 1996, DataView's financial statements are no longer consolidated with HIE due to the immateriality of DataView's current financial position and results of operations. (4) Property and Equipment Property and equipment are summarized as follows:
December 31, ------------ 1997 1996 ---- ---- Machinery and equipment $1,485 $1,198 Furniture and fixtures 335 214 Equipment under capital leases 587 227 Leasehold improvements 80 38 ------ ------ 2,487 1,677 Less accumulated depreciation and amortization 1,013 456 ------ ------ Net property and equipment $1,474 $1,221 ====== ======
F-12 48 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) Accrued Liabilities Accrued liabilities are summarized as follows:
December 31, ----------------- 1997 1996 ---- ---- Project completion costs $1,076 $ -- Benefits and compensation 591 807 License fee (note 11) 560 -- Other 446 174 ------ ------ $2,673 $ 981 ====== ======
(6) Long-Term Debt Long-term debt consists of the following:
December 31, ------------------- 1997 1996 ------- ------- Promissory note payable; interest at 6.4% payable at maturity; secured by a portion of HCI stock; paid in full on January 2, 1998 $3,309 $4,051 Note payable to former shareholder of HCI; principal payable quarterly in amounts ranging from a minimum of $25 to a maximum of 20% of HCI's gross revenue from its Europe/Middle East sales territory; paid in full during July, 1997 -- 200 Obligations under capital leases - equipment leases; interest ranging from 9.44% to 12.76% with various monthly payments and maturing at various dates through May 1, 2001 452 177 ------ ------ Total long-term debt 3,761 4,428 Less current installments 3,501 163 ------ ------ Long-term debt, excluding current installments $ 260 $4,265 ====== ======
Approximate aggregate minimum annual payments due on long-term debt and capital leases subsequent to December 31, 1997 are as follows: 1998, $3,501; 1999, $150; 2000, $102; and 2001, $8. The Company has a $2 million line of credit agreement with a bank. Amounts outstanding under this agreement bear interest at the bank's prime rate plus 1% (9.50% at December 31, 1997) and are payable on demand. No amounts were outstanding on December 31, 1997. F-13 49 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (7) Income Taxes The components of income tax (expense) benefit are as follows:
Years ended December 31, ------------------------ 1997 1996 1995 ---- ---- ---- Current: $ -- $ -- $ 163 Federal -- -- -- State -- -- (23) Foreign -------- -------- -------- $ -- $ -- $ 140 Total income tax benefit ======== ======== ========
A reconciliation of the expected income tax (expense) benefit (based on the U.S. Federal statutory rate) to the actual income tax (expense) benefit is as follows:
Years ended December 31, ------------------------ 1997 1996 1995 ---- ---- ---- Computed expected income tax (expense) benefit $ 2,158 $ (414) $ 3,543 Goodwill amortization and other nondeductible expenses (247) (213) (2003) Losses utilized by Healthdyne -- -- (700) Losses in excess of allowable carrybacks (1,858) (53) (372) Utilization of prior year financial statement losses -- 680 -- Losses of affiliate (53) -- (400) Other -- -- 72 ------- ------- ------- $ -- $ -- $ 140 ======= ======= =======
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset are as follows:
December 31, ------------ 1997 1996 ---- ---- Deferred tax assets (liabilities): Allowance for doubtful accounts $ 61 $ 58 Accruals and reserves not deducted for tax purposes 10 9 Depreciation and amortization (140) (229) Net operating loss carryforwards 4,258 1,869 Tax credit carryforwards 266 157 ------- ------- Total gross deferred tax asset 4,455 1,864 Less valuation allowance 4,455 1,864 ------- ------- Net deferred tax asset $ -- $ -- ======= =======
F-14 50 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements At December 31, 1997, the Company had the following estimated credits and net operating loss carryforwards available for Federal income tax reporting purposes to be applied against future taxable income and tax liabilities:
Net Foreign R&D operating Year of expiration tax credit credit loss ------------------ ---------- ------ ---- 1999 $ 4 $ - $ - 2000 23 - - 2009 - 38 729 2010 - 42 960 2011 - 50 5,524 2012 - 109 4,953 --- ---- ------- $27 $239 $12,166 === ==== =======
The net operating loss carryforward of $12,166 includes deductions of approximately $3,878 related to the exercise of stock options which will be credited to additional paid-in capital when recognized. The alternative minimum tax net operating loss carryforward approximates the regular net operating loss carryforward. A portion of the net operating loss (approximately $2,705) is limited by Section 382 of the Internal Revenue Code of 1986, as amended, to an annual utilization of approximately $168. (8) Shareholders' Equity Capitalization On August 10, 1995, the Company's Board of Directors approved an amendment to the Company's articles of incorporation which increased the number of authorized shares of common stock from 20,000 to 50,000 and increased the number of authorized shares of preferred stock from 10,000 to 20,000. On November 6, 1995, Healthdyne distributed all of the 16,115 then-outstanding shares of the Company's common stock to the Healthdyne shareholders. Public Offering On November 4, 1996, the Company sold 2,750 shares of its common stock and received proceeds of approximately $10,325, net of offering expenses of $634. Stock Option Plans The Company maintains five stock option plans for the benefit of key employees, nonemployee directors, and certain directors and employees of Healthdyne (with such Healthdyne-related plan being established pursuant to the Spin-off). A total of 5,268 shares of the Company's common stock have been authorized for issuance under these plans. Most of the stock options granted under these plans are exercisable in equal amounts over three years and expire in six years. Other terms of options granted under the plans are determined by the Stock Option Committee of the Company's Board of Directors, subject to the terms of the respective plans. F-15 51 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The per share weighted-average fair values of stock options granted during 1997, 1996 and 1995 were $1.12, $1.97 and $0.61, respectively, on the date of grant using the Black- Scholes option-pricing model with the following assumptions:
1997 1996 1995 ---- ---- ---- Expected volatility 40% 41% 46% Expected dividend yield none none none Risk-free interest rate 5.5% 6.25% 6.0% Expected life of stock options 5 years 5 years 5 years
The Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Company's reported net earnings (loss) and related per share amounts would have been changed to the pro forma amounts indicated below:
1997 1996 1995 ---- ---- ---- Net earnings (loss): As reported $(6,166) $1,183 $ (9,983) Pro forma (7,019) 385 (10,265) Diluted net earnings (loss) per share: As reported $ (.30) $ .06 $ (.64) Pro forma (.35) .02 (.66)
Pro forma net earnings (loss) reflects only options granted in 1997, 1996 and 1995. Therefore, the full effect of calculating compensation cost for stock options under SFAS 123 is not reflected in the pro forma net earnings (loss) and related per share amounts presented above because compensation cost is reflected over the vesting period of the options and compensation cost for options granted prior to January 1, 1995 is not considered. A summary of stock option transactions under these plans during 1995, 1996 and 1997 is shown below:
Option price per share ---------------------- Number Weighted of shares Range average --------- ----- ------- Options outstanding at December 31, 1994 - - - Granted (at fair market value on the dates of original grant) 3,242 $0.23 - $1.50 $0.90 Exercised (388) $0.23 - $0.88 $0.35 Canceled or expired - - - ----- Options outstanding at December 31, 1995 2,854 $0.23 - $1.50 $0.98 Granted (at fair market value on the dates of original grant) 1,048 $2.37 - $5.88 $4.34 Exercised (905) $0.23 - $1.50 $0.50 Canceled or expired (169) $0.23 - $4.81 $3.77 ----- Options outstanding at December 31, 1996 2,828 $0.23 - $5.88 $2.21 Granted (at fair market value on the dates of original grant) 1,159 $1.62 - $5.88 $2.78 Exercised (193) $0.23 - $1.50 $0.93 Canceled or expired (440) $1.31 - $5.88 $3.90 ----- Options outstanding at December 31, 1997 3,354 $0.23 - $5.88 $2.20 =====
F-16 52 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Options exercisable at December 31, 1995 1,820 $0.23 - $1.50 $0.68 ===== Options exercisable at December 31, 1996 1,300 $0.23 - $1.50 $1.06 ===== Options exercisable at December 31, 1997 1,464 $0.23 - $5.88 $1.57 =====
The following table summarizes information about stock options outstanding and exercisable at December 31, 1997:
Options outstanding Options exercisable ------------------------------------- ----------------------- Weighted average Weighted Weighted Number remaining average Number average outstanding contractual exercise exercisable exercise Classification at 12/31/97 life (months) price at 12/31/97 price -------------- ----------- ------------- ----- ----------- ----- Healthdyne-related 407 35 $0.43 407 $0.43 Directors 144 47 $2.06 84 $1.71 Others 2,803 53 $2.47 973 $2.04 ----- ----- 3,354 50 $2.20 1,464 $1.57 ===== =====
Non-Employee Directors Stock Plan On October 20, 1995, the Company established a stock plan for non-employee directors whereby such directors may elect to receive all or a portion of their annual retainer fee in unrestricted shares of the Company's common stock. As of December 31, 1997, none of the 250 shares reserved for this plan have been issued. Stock Purchase Plan On July 1, 1996, the Company commenced an employee stock purchase plan for all eligible employees of HIE and designated subsidiaries. Participants may use up to 10% of their compensation to purchase the Company's common stock through payroll deductions for 85% of the lower of the beginning or ending stock price on a quarterly basis. Of the 200 shares of the Company's common stock reserved for issuance under this plan, 82 shares and 14 shares were issued during the years ended December 31, 1997 and 1996, respectively. Compensation cost related to this plan determined under SFAS 123 had an insignificant effect on the pro forma net earnings (loss) and pro forma diluted net earnings (loss) per share information disclosed above for 1997 and 1996. Shareholder Rights Plan On October 20, 1995, the Company's Board of Directors declared a dividend distribution of one purchase right for each share of the Company's common stock outstanding as of October 30, 1995. If a person or group acquires beneficial ownership of 15% or more of the Company's outstanding common stock or announces a tender offer or exchange that would result in the acquisition of a beneficial ownership right of 20% or more of the Company's outstanding common stock, the rights detach from the common stock and are distributed to shareholders as separate securities. Each right entitles its holder to purchase one one-hundredth of a share (a unit) of Series A Cumulative Preferred Stock, at a purchase F-17 53 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements price of $50 per unit. The rights, which do not have voting power, expire on October 23, 2005 unless previously distributed and may be redeemed by the Company in whole at a price of $.01 per right at any time before and within 10 days after their distribution. If the Company is acquired in a merger or other business combination transaction, or 50% of its assets or earnings power are sold at any time after the rights become exercisable, the rights entitle a holder to buy a number of common shares of the acquiring company having a market value of twice the exercise price of the right. If a person acquires 20% of the Company's common stock or if a 15% or larger holder merges with the Company and the common stock is not changed or exchanged in such merger, or engages in self-dealing transactions with the Company, each right not owned by such holder becomes exercisable for the number of common shares of the Company having a market value of twice the exercise price of the right. (9) Employee Benefit Plans The Company and HCI each maintain a 401(k) defined contribution plan for the benefit of their employees. Prior to June 1, 1996, the Company's obligation for contributions under its 401(k) plan was limited to the lesser of (i) one-half of each participant's contribution but not more than 2.5% of the participant's compensation or (ii) 20% of the Company's pretax earnings before consideration of this contribution. Subsequent to June 1, 1996, Company contributions are discretionary. The HCI plan provides for HCI contributions equal to one-half of each participant's contributions up to 3% of the participant's base salary. Contributions to the plans included in the consolidated statements of operations were approximately $72, $79 and $81 in 1997, 1996 and 1995, respectively. (10) Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, Disclosure about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions are set forth below for the Company's financial instruments. (a) Cash and Cash Equivalents The carrying amount approximates fair value because of the short maturity of these instruments. (b) Long-Term Debt The Company estimates that the carrying amount of the Company's long-term debt approximates the fair value based on the current rates offered to the Company for debt of the same remaining maturities. F-18 54 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (11) Commitments The Company is committed under non-cancelable operating lease and capital lease agreements for facilities and equipment. The future minimum annual lease payments under these leases are summarized as follows:
Operating Capital Year ending December 31, leases leases ------------------------ ------ ------ 1998 $ 677 $228 1999 555 168 2000 434 109 2001 202 9 2002 193 - Thereafter 32 - ------ ---- $2,093 514 ====== Less interest 62 ---- Present value of future minimum capital lease payments $452 ====
Rental expense for operating leases (except those with lease terms of a month or less that were not renewed) was $728, $600 and $362 in 1997, 1996 and 1995, respectively. In conjunction with the acquisition of CHS on December 31, 1997, HIE assumed an $840 minimum third-party software license fee obligation, which is payable $560 in 1998 and $280 upon termination of this renewable license and is included in accrued liabilities and other liabilities, respectively, in the accompanying Consolidated Balance Sheet as of December 31, 1997 (see note 5). (12) Major Customers No single customer accounted for more than 10% of the Company's revenue in either 1997 or 1995. One customer accounted for approximately 25% of the Company's revenue in 1996. No single distributor provided customers to the Company that accounted for more than 10% of the Company's revenue in either 1997 or 1996. One distributor provided customers to the Company that accounted for approximately 18% of the Company's revenue in 1995. F-19 55 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The section of the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement") captioned "Certain Nominees for Board of Directors" under "Proposal 1. Election of Directors" identifies members of the Board of Directors of the Company and nominees, and is incorporated in this Item 10 by reference. See also "Executive Officers of the Company" appearing in Part I hereof. ITEM 11. EXECUTIVE COMPENSATION The information in the section of the 1998 Proxy Statement captioned "Executive Compensation and Other Information" is incorporated in this Item 11 by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information in the section of the 1998 Proxy Statement captioned "Security Ownership of Certain Beneficial Owners and Management" is incorporated in this Item 12 by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information in the section of the 1998 Proxy Statement captioned "Certain Relationships and Related Transactions" is incorporated in this Item 13 by reference. 36 56 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements of the Company and its subsidiaries and report of independent auditors thereon are included as Pages F-1 through F-19 of this Annual Report on Form 10-K: Independent Auditors' Report Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Operations - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements (a)(2) The following supporting financial statement schedule and report of independent auditors thereon are included as part of this Annual Report on Form 10-K: Independent Auditors' Report Schedule II - Valuation and Qualifying Accounts All other Schedules are omitted because the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes. (a)(3) Exhibits:
Exhibit Number Description - ------ ----------- 2.1 Distribution Agreement between Healthdyne and HIE (filed as Exhibit 2.1 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478) (the "Form S-1"), and incorporated herein by reference). 3.1(a) Articles of Incorporation of HIE (the "Articles of Incorporation") (filed as Exhibit 4(b) to the Company's Registration Statement on Form S-8 with respect to Stock Option Plan I (the "Form S-8"), and incorporated herein by reference). 3.1(b) Articles of Amendment dated August 30, 1995 to the Articles of Incorporation (filed as Exhibit 4(c) to the Form S-8, and incorporated herein by reference). 3.1(c) Articles of Amendment dated October 31, 1995 to the Articles of Incorporation (filed as Exhibit 4(d) to the Form S-8, and incorporated herein by reference).
37 57 3.2 By-Laws of HIE, as amended (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference). 4 Rights Agreement dated October 23, 1995 between HIE and SunTrust Bank (filed as Exhibit 4 to Amendment No. 1 to the Form S-1, and incorporated herein by reference). 10.1 Tax Indemnity Agreement between Healthdyne and HIE (filed as Exhibit 10.2 to Amendment No. 1 to the Form S-1, and incorporated herein by reference). 10.2 Tax Disaffiliation Agreement between Healthdyne and HIE (filed as Exhibit 10.3 to Amendment No. 1 to the Form S-1, and incorporated herein by reference). 10.3 License Agreement between Healthdyne and HIE (filed as Exhibit 10.4 to Amendment No. 1 to the Form S-1, and incorporated herein by reference). 10.4 Shareholders Agreement, dated as of July 22, 1994, between Healthdyne, DataView and Shareholders (as defined therein) (filed as Exhibit 2.5 to the Form S-1, and incorporated herein by reference). 10.5 Option Agreement, dated as of July 22, 1994, between Healthdyne, DataView and Shareholders (as defined therein) (filed as Exhibit 2.6 to the Form S-1, and incorporated herein by reference). 10.6 Funding Agreement, dated as of July 22, 1994, between Healthdyne, DataView and Shareholders (as defined therein) (filed as Exhibit 10.11 to the Form S-1, and incorporated herein by reference). 10.7 Agreement dated as of April 1, 1996 among HIE, DataView, Kurt Farhy, John Ernissee and Richard Bigelow (filed as Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference). 10.8 Option Agreement dated December 18, 1996 between HIE and The Southern Venture Fund II, L.P. ("SVFII") (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference). 10.9 Agreement dated June 13, 1997 between HIE, Criterion Health Strategies, Inc. ("CHS") and Brenton L. Teveit (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated June 13, 1997, and incorporated herein by reference). 10.10 Agreement dated June 13, 1997 between HIE, CHS and J. Edward Pearson, Jr. (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated June 13, 1997, and incorporated herein by reference). 10.11 First Amendment to Option Agreement dated December 31, 1997 between HIE and SVFII (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 31, 1997, and incorporated herein by reference). 10.12 Amended and Restated Stock Purchase Warrant dated December 31, 1997 between HIE and SVFII (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated December 31, 1997, and incorporated herein by reference). 38 58 10.13 HIE Adjustment Stock Option Plan (filed as Exhibit 10.5 to Amendment No. 1 to the Form S-1, and incorporated herein by reference). 10.14 Form of Director Agreement under HIE Adjustment Stock Option Plan. 10.15 HIE Stock Option Plan I (filed as Exhibit 10.6 to the Form S-1, and incorporated herein by reference). 10.16 Form of Agreement under HIE Stock Option Plan I. 10.17 HIE Restated Stock Option Plan Two (filed as Exhibit 10.7 to the Form S-1, and incorporated herein by reference). 10.18 Form of Agreement under HIE Restated Stock Option Plan Two. 10.19 Non-employee Director Stock Option Plan (filed as Exhibit 10.8 to the Form S-1, and incorporated herein by reference). 10.20 Form of Agreement under Non-employee Director Stock Option Plan. 10.21 Non-employee Directors Stock Plan (filed as Exhibit 10.9 to the Form S-1, and incorporated herein by reference). 10.22 HIE 1996 EBU Tandem Stock Option Plan (filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference). 10.23 HIE Employee Stock Purchase Plan (filed as Exhibit A to the Company's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders, and incorporated herein by reference). 10.24 HIE Employee Stock Purchase Plan Enrollment Form. 11 Statement of Computation of per Share Earnings (Loss). 21 Subsidiaries of the Company. 23 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule (for purposes of the Securities and Exchange Commission only). (b) Reports on Form 8-K: During the quarter ended December 31, 1997, the Company filed a Current Report on Form 8-K dated October 21, 1997, which reported under Item 5 certain management changes. In addition, on January 28, 1998, the Company filed a Current Report on Form 8-K dated December 31, 1997, reporting under Item 5 certain transactions relative to its subsidiaries CHS and HCI. 39 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HEALTHDYNE INFORMATION ENTERPRISES, INC. By: /s/ Robert I. Murrie -------------------------------------- Robert I. Murrie President and Chief Executive Officer (Principal Executive Officer) March 18, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ Parker H. Petit Chairman of the Board of Directors March 18, 1998 - --------------------------------- Parker H. Petit /s/ Robert I. Murrie Director, President and Chief Executive March 18, 1998 - ----------------------- Officer (Principal Executive Officer) Robert I. Murrie /s/ Joseph G. Bleser Director, Executive Vice President, Chief March 18, 1998 - --------------------------------- Financial Officer, Treasurer and Joseph G. Bleser Secretary (Principal Financial Officer) /s/ Cheryl N. Blanco Vice President - Controller, Chief March 18, 1998 - --------------------------------- Accounting Officer, Assistant Treasurer Cheryl N. Blanco and Assistant Secretary (Principal Accounting Officer) /s/ J. Terry Dewberry Director March 18, 1998 - --------------------------------- J. Terry Dewberry /s/ William J. Gresham, Jr. Director March 18, 1998 - --------------------------------- William J. Gresham, Jr. /s/ Charles R. Hatcher, Jr. Director March 18, 1998 - --------------------------------- Charles R. Hatcher, Jr. /s/ John W. Lawless Director March 18, 1998 - --------------------------------- John W. Lawless /s/ Carl E. Sanders Director March 18, 1998 - --------------------------------- Carl E. Sanders /s/ Donald W. Weber Director March 18, 1998 - --------------------------------- Donald W. Weber
40 60 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Healthdyne Information Enterprises, Inc. Under date of January 23, 1998, we reported on the consolidated balance sheets of Healthdyne Information Enterprises, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, as contained in the annual report on Form 10-K for the year 1997. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Atlanta, Georgia January 23, 1997 61 SCHEDULE II HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF PERIOD EXPENSES ADDITIONS DEDUCTIONS PERIOD DESCRIPTION Allowance for Doubtful Accounts: Year ended December 31, 1995 $ 9 $ 43 $64* $ (31)** $ 85 Year ended December 31, 1996 $ 85 $ 92 $-- $ (12)*** $165 Year ended December 31, 1997 $165 $393 $-- $(151)** $407
* Represents beginning balances in allowance for doubtful accounts of acquired companies. ** Uncollected receivables written off. *** Represents the balance in allowance for doubtful accounts of a company no longer consolidated with the Company's financial statements. 62 INDEX TO EXHIBITS
Exhibit Number Description - ------ ----------- 2.1 Distribution Agreement between Healthdyne and HIE (filed as Exhibit 2.1 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478) (the "Form S-1"), and incorporated herein by reference). 3.1(a) Articles of Incorporation of HIE (the "Articles of Incorporation") (filed as Exhibit 4(b) to the Company's Registration Statement on Form S-8 with respect to Stock Option Plan I (the "Form S-8"), and incorporated herein by reference). 3.1(b) Articles of Amendment dated August 30, 1995 to the Articles of Incorporation (filed as Exhibit 4(c) to the Form S-8, and incorporated herein by reference). 3.1(c) Articles of Amendment dated October 31, 1995 to the Articles of Incorporation (filed as Exhibit 4(d) to the Form S-8, and incorporated herein by reference). 3.2 By-Laws of HIE, as amended (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference). 4 Rights Agreement dated October 23, 1995 between HIE and SunTrust Bank (filed as Exhibit 4 to Amendment No. 1 to the Form S-1, and incorporated herein by reference). 10.1 Tax Indemnity Agreement between Healthdyne and HIE (filed as Exhibit 10.2 to Amendment No. 1 to the Form S-1, and incorporated herein by reference). 10.2 Tax Disaffiliation Agreement between Healthdyne and HIE (filed as Exhibit 10.3 to Amendment No. 1 to the Form S-1, and incorporated herein by reference). 10.3 License Agreement between Healthdyne and HIE (filed as Exhibit 10.4 to Amendment No. 1 to the Form S-1, and incorporated herein by reference). 10.4 Shareholders Agreement, dated as of July 22, 1994, between Healthdyne, DataView and Shareholders (as defined therein) (filed as Exhibit 2.5 to the Form S-1, and incorporated herein by reference). 10.5 Option Agreement, dated as of July 22, 1994, between Healthdyne, DataView and Shareholders (as defined therein) (filed as Exhibit 2.6 to the Form S-1, and incorporated herein by reference). 10.6 Funding Agreement, dated as of July 22, 1994, between Healthdyne, DataView and Shareholders (as defined therein) (filed as Exhibit 10.11 to the Form S-1, and incorporated herein by reference). 10.7 Agreement dated as of April 1, 1996 among HIE, DataView, Kurt Farhy, John Ernissee and Richard Bigelow (filed as Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference). 10.8 Option Agreement dated December 18, 1996 between HIE and The Southern Venture Fund II, L.P. ("SVFII") (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference).
63 10.9 Agreement dated June 13, 1997 between HIE, Criterion Health Strategies, Inc. ("CHS") and Brenton L. Teveit (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated June 13, 1997, and incorporated herein by reference). 10.10 Agreement dated June 13, 1997 between HIE, CHS and J. Edward Pearson, Jr. (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated June 13, 1997, and incorporated herein by reference). 10.11 First Amendment to Option Agreement dated December 31, 1997 between HIE and SVFII (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 31, 1997, and incorporated herein by reference). 10.12 Amended and Restated Stock Purchase Warrant dated December 31, 1997 between HIE and SVFII (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated December 31, 1997, and incorporated herein by reference). 10.13 HIE Adjustment Stock Option Plan (filed as Exhibit 10.5 to Amendment No. 1 to the Form S-1, and incorporated herein by reference). 10.14 Form of Director Agreement under HIE Adjustment Stock Option Plan. 10.15 HIE Stock Option Plan I (filed as Exhibit 10.6 to the Form S-1, and incorporated herein by reference). 10.16 Form of Agreement under HIE Stock Option Plan I. 10.17 HIE Restated Stock Option Plan Two (filed as Exhibit 10.7 to the Form S-1, and incorporated herein by reference). 10.18 Form of Agreement under HIE Restated Stock Option Plan Two. 10.19 Non-employee Director Stock Option Plan (filed as Exhibit 10.8 to the Form S-1, and incorporated herein by reference). 10.20 Form of Agreement under Non-employee Director Stock Option Plan. 10.21 Non-employee Directors Stock Plan (filed as Exhibit 10.9 to the Form S-1, and incorporated herein by reference). 10.22 HIE 1996 EBU Tandem Stock Option Plan (filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference). 10.23 HIE Employee Stock Purchase Plan (filed as Exhibit A to the Company's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders, and incorporated herein by reference). 10.24 HIE Employee Stock Purchase Plan Enrollment Form. 11 Statement of Computation of per Share Earnings (Loss). 21 Subsidiaries of the Company. 23 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule (for purposes of the Securities and Exchange Commission only).
EX-10.14 2 FORM OF DIR. AGMT. UNDER HIE ADJ.STOCK OPTION PLAN 1 EXHIBIT 10.14 HEALTHDYNE INFORMATION ENTERPRISES INC. NON-EMPLOYEE DIRECTOR STOCK OPTION COMMON STOCK ($.01 PAR VALUE) OPTION FOR THE PURCHASE OF: SHARES ----------------------------------- EXERCISE PRICE PER SHARE: $ THIS OPTION AGREEMENT, made and entered into as of the ___ day of ________, ____ (the "Effective Date"), by and between HEALTHDYNE INFORMATION ENTERPRISES, INC., a Georgia corporation (the "Corporation"), and ______________, (the"Optionee"); W I T N E S S E T H : WHEREAS, the Optionee has been elected by the shareholders to serve on the Company's Board of Directors, and the Company has determined that the Optionee is not an employee of the Company; and WHEREAS, the Company has determined that it is desirable to grant to the Optionee an option to purchase a limited number of shares of its common stock and upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the Optionee's services to the Company and in consideration of the mutual covenants contained herein, the parties hereto do hereby agree as follows: 1. General Definitions. For purposes of this Option Agreement, each of the following terms, when used herein, shall have the meaning hereinafter provided: (a) "Change in Control" shall mean a change in control of the business and operation of the Company of such a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the Effective Date; provided that, without limitation, such a change in control shall be deemed to have occurred if any "person" (as such term is used in Section 13(d)(2) of the Exchange Act) after the Effective Date, becomes a beneficial owner, directly or indirectly of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities. (b) The "Code" shall mean the Internal Revenue Code of 1986. (c) "Common Stock" shall mean the common stock of the Company, $.01 par value per share. 2 (d) The "Company" shall mean Healthdyne Information Enterprises, Inc. (e) The "Exercise Date" shall mean (subject to the approval of Amendment No. 1 to the Company's Non-employee Director Stock Option Plan by the shareholders of the Company) the date which is the earlier of (i) thirty (30) days prior to the date of any extraordinary corporate proceeding affecting the Company (as determined by the Board), pursuant to which the Company is not to survive immediately following the proceeding and/or which results in a Change in Control of the Company (by merger, consolidation, sale or acquisition of assets or stock or otherwise) if the Optionee's service on the Board of Directors is discontinued or terminated due to or as a result of such extraordinary corporate proceeding; or (ii) the fourth anniversary from the Effective Date; provided that this Option shall be exercisable prior thereto as to the percentage of the shares of Common Stock then subject to this Option indicated by the table below, based upon the number of years from the Effective Date:
NUMBER OF YEARS FROM PERCENTAGE OF SHARES - ------------------------------------------------------------------------------- A least 1 but 25% less than 2 A least 2 but 50% less than 3 At least 3 but 75% less than 4
(f) The "Expiration Date" shall mean the date on which this Option expires pursuant to the provisions of paragraph 4 hereof. (g) This "Option" shall mean the option evidenced by the Option Agreement. (h) The "Option Price" shall mean the purchase price of each share of Common Stock that may be purchased by the Optionee upon the exercise of this Option, in whole or in part, as adjusted from time to time in accordance with the provisions hereof. (i) The "Stock Option Plan" shall mean the Non-employee Director Stock Option Plan adopted by the Board of Directors of the Company on August 30, 1995. (j) The "Subsidiaries" shall mean any corporations now or hereafter existing which are "subsidiary corporations" of the Company within the meaning of Section 425(f) of the Code. 2. Grant of Option. Upon the terms and subject to the conditions and limitations hereinafter set forth, the Optionee shall have the right, at any time after the Exercise Date and on 2 3 or before the Expiration Date, to purchase the number of shares of Common Stock set forth on page one (1) of this Option Agreement, such number of shares being subject to adjustment in accordance with the provisions set forth below, and in accordance with the terms of the Plan notwithstanding anything to the contrary herein. 3. Manner of Exercise. Subject to the terms, conditions and limitations set forth herein, this Option may be exercised in whole or in part at any time or from time to time after the Exercise Date and on or before the Expiration Date as to any part of the number of whole shares of Common Stock then subject to this Option. Such exercise shall be effective only if the Optionee duly executes and delivers to the Company, at the principal executive office of the Company or at such other address as the Company may designate by notice in writing to the Optionee, an option exercise form substantially the same as that attached hereto as Exhibit A, indicating the number of shares of Common Stock to be purchased and accompanied by cash in an amount equal to the purchase price of such shares. Upon any effective exercise of this Option, the Company shall become obligated to issue a certificate or certificates to the Optionee representing the number of shares of Common Stock so purchased. No fractional shares will be issued. 4. Expiration of Option. This Option shall expire, shall become null and void, and shall be of no further force and effect upon the earlier to occur of the following events: (a) The fifth anniversary of the Effective Date; (b) Thirty (30) days after termination of the Optionee's service on the Board of Directors of the Company; provided, however, that in the event of the death of the Optionee while serving as a member of the Board of Directors, the Option shall terminate six (6) months following the date of death; or (c) Thirty (30) days after the Optionee becomes an employee of the Company or its Subsidiaries. 5. Holder's Exercise Subject to Compliance with Securities Laws. Notwithstanding the exercise of this Option, in whole or in part, in accordance with all other provisions of this Option, the exercise of this Option shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of shares of Common Stock pursuant to such exercise will not violate any state or federal securities or other laws. The Company may require, as a condition of the effectiveness of the exercise of this Option, a written agreement that all shares of Common Stock to be acquired pursuant to such exercise shall be held for investment for the Optionee's own account without a view to any further distribution thereof, that the certificates for such shares shall bear an appropriate legend to that effect and that such shares will not be transferred or disposed of except in compliance with applicable federal and state laws. The Company may, in its sole discretion, defer the effectiveness of any exercise of this Option in order to allow the issuance of shares of Common Stock pursuant thereto to be made pursuant to registration or an exemption from registration or other methods for compliance available under federal or state securities laws. The Company shall be under no obligation to 3 4 effect the registration pursuant to the Securities Act of 1933, as amended, of any shares of Common Stock to be issued hereunder or to effect similar compliance under any state laws. The Company shall inform the Optionee in writing of its decision to defer the effectiveness of the exercise of this Option. During the period that the exercise of this Option has been deferred, the Optionee may, by written notice, withdraw such exercise and obtain the refund of any amount paid with respect thereto. 6. Adjustment of Option Price and Number of Shares That May Be Purchased Hereunder. The Option Price and the number of shares of Common Stock that may be purchased hereunder shall be subject to adjustment from time to time in accordance with the following provisions: (a) In the event of the issuance of additional shares of Common Stock as a dividend, from and after the record date for the determination of shareholders entitled to such dividend the Optionee (until another such adjustment, if any) shall be entitled to purchase under this Option the number of shares of Common Stock, calculated to the nearest full share, obtained by multiplying the number of shares of Common Stock subject to this Option immediately prior to said record date by the percentage that the number of additional shares constituting any such dividend is of the total number of shares of Common Stock outstanding immediately prior to said record date and adding the result so obtained to the number of shares of Common Stock subject to this Option immediately prior to said record date. Under each adjustment made pursuant to this subparagraph (a) to the number of shares of Common Stock that the Optionee may purchase under this Option pursuant to this subparagraph (a), the Option Price in effect immediately prior to such adjustment shall be reduced to an amount determined by dividing (i) the product obtained by multiplying such Option Price by the number of shares of Common Stock subject to this Option immediately prior to such adjustment by (ii) the number of shares of Common Stock subject to this Option immediately following such adjustment. (b) If the Company should at any time subdivide the outstanding shares of its Common Stock, the Option Price in effect immediately prior to such subdivision shall be proportionately decreased, and if the Company should at any time combine the outstanding shares of its Common Stock, the Option Price in effect immediately prior to such combination shall be proportionately increased, effective from and after the record date of such subdivision or combination, as the case may be. Upon each adjustment of the Option Price made pursuant to this subparagraph (b), the Optionee (until another such adjustment, if any) shall be entitled to purchase, at the adjusted Option Price, the number of shares of Common Stock, calculated to the nearest full share, obtained by dividing (i) the product obtained by multiplying the number of shares of Common Stock subject to this Option Price in effect prior to such adjustment by (ii) the adjusted Option Price. 4 5 7. Reorganization, Reclassification, Consolidation or Merger. If at any time while this Option is outstanding there should be any reorganization or reclassification of the Common Stock of the Company (other than a subdivision or combination of shares provided for in paragraph 6 above), or any consolidation or merger of the Company with another corporation, then the number of shares of Common Stock or other securities or property of the Company or of the successor corporation resulting from such consolidation or merger, as the case may be, to which a holder of the number of shares of Common Stock that may then be purchased upon the exercise of this Option would have been entitled upon such reorganization, reclassification, consolidation or merger if this Option had been exercised in full immediately prior to such reorganization, reclassification, consolidation or merger, may thereafter be purchased hereunder in lieu of the shares of Common Stock theretofore subject to this Option; and in any such case, appropriate adjustment shall be made in the application of the provisions herein set forth with respect to the rights and interest thereafter of the Optionee to the end that the provisions set forth herein (including the adjustment of the Option Price and the number of shares issuable upon the exercise of this Option) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares or other property that may thereafter be purchased hereunder. 8. Notice of Adjustment. Upon the occurrence of any adjustment of the Option Price, any increase or decrease in the number of shares of Common Stock that may be purchased upon the exercise of this Option, or any reorganization, reclassification, consolidation, merger or other transaction to which paragraph 7 hereof shall apply, then, and in each such case, the Company, within thirty (30) days thereafter, shall give written notice thereof to the Optionee at the address of the Optionee as shown on the books of the Company, which notice shall state the Option Price as adjusted and the increased or decreased number of shares that may be purchased upon the exercise of this Option, setting forth in reasonable detail the method of calculation of each. 9. Charges, Taxes and Expenses. The issuance of certificates for shares of Common Stock upon any exercise of this Option shall be made without charge to the Optionee for any transfer tax or other such expense imposed or incurred with respect to the issuance of such certificates, all of which taxes and expenses shall be paid by the Company. 10. Assignment. This Option may not be transferred or assigned by the Optionee otherwise than by will or by the laws of descent and distribution and, during the lifetime of the Optionee, may be exercised, in whole or in part, only by the Optionee. 11. Miscellaneous. (a) The Company covenants that it will at all times reserve and keep available, solely for the purpose of issue upon the exercise of this Option, a sufficient number of shares of Common Stock to permit the exercise of this Option in full. (b) The Company shall use its best efforts to cause the Stock Option Plan to be submitted to its shareholders at the Company's next annual meeting and shall recommend the Stock Option Plan to the shareholders for approval. 5 6 (c) The terms of this Option shall be binding upon and shall inure to the benefit of any successors or assigns of the Company and of the Optionee. (d) In the event of any inconsistency between this Option Agreement and the Stock Option Plan, the Stock Option Plan shall control. (e) The Optionee shall not be entitled to vote or to receive dividends with respect to any Common Stock that may be, but has not been, purchased under this Option and shall not be deemed to be a shareholder of the Company with respect to any such Common Stock for any purpose. IN WITNESS WHEREOF, the Company and the Optionee have executed this Option Agreement as of the day and year first above written. HEALTHDYNE INFORMATION ENTERPRISES, INC. (CORPORATE SEAL) By: ---------------------------------------- President ATTEST: - ------------------------------- Secretary OPTIONEE: -------------------------------------------- 6 7 EXHIBIT A OPTION EXERCISE FORM (To be executed by the Employee to exercise the rights to purchase Common Stock evidenced by the foregoing Option) TO: HEALTHDYNE INFORMATION ENTERPRISES, INC. The undersigned hereby exercises the right to purchase ___________ shares of Common Stock covered by the attached Option in accordance with the terms and conditions thereof, and herewith makes payment of the Option Price of such shares in full. -------------------------------------------- Signature -------------------------------------------- -------------------------------------------- Address -------------------------------------------- Social Security Number Date: ____________________, 19____ EX-10.16 3 FORM OF AGMT.UNDER HIE RESTATED STOCK OPTION PLAN1 1 EXHIBIT 10.16 HEALTHDYNE INFORMATION ENTERPRISES, INC. STOCK OPTION PLAN I NONQUALIFIED STOCK OPTION AGREEMENT OPTION FOR THE PURCHASE OF: ______________ SHARES EXERCISE PRICE PER SHARE: $ This Agreement made and entered into as of this ____ day of _________, ______, by and between Healthdyne Information Enterprises, Inc., a Georgia corporation, hereinafter referred to as the "Company", and name, hereinafter referred to as the "Participant". W I T N E S S E T H: WHEREAS, a Healthdyne Information Enterprises, Inc. Stock Option Plan I, hereinafter referred to as the "Plan", has been adopted by the Company; and WHEREAS, Section 6.1 of the Plan authorizes the Stock Option Committee of Healthdyne, Inc. or the Company, hereinafter referred to as the "Committee", to cause the Company to enter into a written agreement with the Participant setting forth the form and the amount of any award and any conditions and restrictions on the award imposed by the Plan and the Committee; and WHEREAS, the Committee desires to make an award to the Participant consisting of a Nonqualified Stock Option; NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Participant hereby agree as follows: 1. Option Grant. The Company hereby grants to the Participant a Nonqualified Stock Option pursuant to the Plan to purchase the number of shares of Common Stock of the Company set forth above (hereinafter referred to as "Common Stock"), at the price per share set forth above, subject to the terms and conditions of this Agreement. The Nonqualified Stock Option is referred to herein as the "Option". 2. Option Vesting. The Participant agrees that he must remain continuously employed by the Company or any Subsidiary thereof or engaged to provide services thereto for one year from the date of this Agreement in order for the exercise of any part of the Option to accrue. Subject to the preceding sentence and until terminated as provided in Paragraph 4, the Option shall become exercisable on the first anniversary date of this Agreement to the extent of 2 thirty-three and one-third percent (33-1/3%) of the shares of Common Stock subject to the Option. The Option shall become exercisable on each of the next two (2) anniversary dates of this Agreement to the extent of an additional thirty-three and one-third percent (33-1/3%) of the shares of Common Stock subject to the Option; provided the Participant shall have been in the continuous employ of the Company or any Subsidiary thereof or engaged to provide services thereto since the date of this Agreement. Although the Option may remain exercisable after a termination of employment under the limited circumstances specifically set forth in Paragraph 4 hereof, vesting of the Option shall cease as of the applicable date of termination or disability referred to in Paragraph 4 and the Option shall be exercisable during such extended periods of time only to the extent that it was exercisable on such date of termination or disability. Notwithstanding the foregoing, as of the date of any dissolution or liquidation of the Company or any merger or combination in which the Company is not a surviving corporation this Option shall terminate, but the Participant shall have the right immediately prior to such termination, in accordance with procedures established by the Committee, to exercise the Option in whole or in part without regard to the installment requirements described above. 3. Manner of Exercise. The Participant may exercise the Option by delivering written notice to the Company on a form set forth in Exhibit A hereto or as otherwise provided by the Committee indicating the number of shares to be purchased. The Company agrees to cause certificates for any shares of Common Stock purchased hereunder to be delivered to the Participant upon payment in full of the Option price in cash, unrestricted shares of Common Stock, or a combination of such Common Stock and cash. Any shares of Common Stock applied toward the Option price shall be valued at their Fair Market Value on the date of exercise of the Option, shall have been held by the holder hereof for at least six (6) months or such longer period of time as may be necessary for such shares to be deemed to constitute "mature" shares for accounting purposes, and shall be delivered along with any portion of the Option price to be paid in cash within five (5) days after the date of exercise. If the Participant fails to pay the Option price within five (5) days, the Committee shall have the right in its sole discretion to void the exercise of the Option. 4. Expiration of Option. The Option shall terminate on the earliest to occur of the following dates: (a) The date upon which the Participant is dismissed from his or her employment or consulting engagement with the Company and the Subsidiaries for good cause (as defined by the Participant's employment or consulting agreement or applicable personnel policy, as the case may be) or other serious misconduct (as defined in the Plan); (b) Sixty (60) days after the date of which the Company terminated the Participant's full-time employment or consulting engagement with the Company other than for cause as described in Subsection 4(a) above, retirement, disability (as determined by the Social Security Administration), or death; (c) Twelve (12) months after the Participant's termination of full-time employment or consulting engagement due to his retirement from the Company or any Subsidiary thereof; (d) Twelve (12) months after the Participant's date of death; 2 3 (e) Twelve (12) months from the date of the disabling event which shall render the Participant totally and permanently disabled, as determined by the Social Security Administration; (f) Six (6) years from the date the Option is granted. For purposes of this Paragraph 4, the date of termination of employment or consulting shall mean the last date upon which such employment services are provided on a full-time basis or such consulting services are regularly provided by the Participant, without extension or any severance period or other compensation payable in connection with such termination but with extension for any periods of time related to mandated notices of termination to the extent required to be given to the Participant by the Company or any Subsidiary under any applicable employment agreement or personnel policy. 5. Holder's Exercise Subject to Compliance with Securities Laws. Notwithstanding the exercise of this Option, in whole or in part, in accordance with all other provisions of this Option, the Company shall have no obligation to honor such exercise and to issue Common Stock pursuant thereto unless and until (a) the shares of Common Stock to be purchased pursuant to such exercise shall have been registered under the Securities Act of 1933, as amended, and under all applicable state securities laws, unless the Company shall have received an opinion of counsel satisfactory to the Company to the effect that such registration is not required, or, (b) at the Company's request, the Participant furnishes the Company prior to the issuance of any shares pursuant to the exercise of this Option, an agreement in which the Participant represents that the shares acquired by him upon exercise, if the shares are not registered pursuant to applicable state and/or federal securities laws, are being acquired for investment and not with a view to the sale or distribution thereof. If the foregoing conditions shall not have been met within sixty (60) days after exercise, the Company may elect to treat such exercise as null and void. Upon the Company's election to treat any such exercise as null and void, the Company shall return any cash delivered in payment for shares of Common Stock upon such exercise. No such voided exercise shall prejudice the Optionee's right to exercise this Option, in whole or in part, at any other time. 6. Exercise by Estate Following Death. In the event the Participant shall die prior to the exercise of the Option granted pursuant to this Agreement, the administrator of the deceased Participant's estate, the executor under his will, or the person or persons to whom the Option shall have been validly transferred by such executor or administrator pursuant to the will or laws of intestate succession, shall have the right to exercise the Option to the extent exercisable on the date of the Participant's death, subject to the terms of this Agreement. 7. Liens and Encumbrances. Except as provided in Paragraph 6, no benefit under the Plan or this Agreement shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, excluding the use of Options under the Plan as collateral in exercising the Option, and any attempt to do so shall be null and void. No such benefits shall be in any manner liable for or subject to the debts, contracts, liabilities, engagements, or torts of the Participant prior to the receipt thereof by the Participant. 8. Limitation on Exercise. No election as to benefits or the exercise of the Option may be made during the Participant's lifetime by anyone other than the Participant, or his legal representative in the event of the Participant's disability. In addition, no Option may be exercised within one hundred eighty (180) days after the date of closing of a public offering or public 3 4 distribution of a portion of the Company's Common Stock following which the Common Stock is registered under Section 12 of the Securities Exchange Act of 1934, unless in the absence of such exercise the Option would expire or terminate in accordance with its terms prior to the end of such one hundred eighty (180) day period. 9. Violation of Laws. The Options shall not be exercisable if such exercise would involve a violation of any applicable federal or state securities laws, and the Company hereby agrees to make reasonable efforts to comply with such securities laws. 10. Adjustments by Committee. The Committee shall make such adjustments to the Option price and in the number or kind of shares of Common Stock covered by the Option consistent with the terms of the Plan as the Committee in its sole discretion may determine is equitably required to prevent dilution or enlargement of the rights of the Participant that otherwise would result from (a) any stock dividend, stock split, combination of shares, distribution of assets, recapitalization, or other change in the capital structure of the Company, or (b) any merger, or (c) any other corporate transaction or event having an effect similar to any of the foregoing. 11. Transfer to Subsidiary or Affiliate. The continuous employ or engagement of the Participant with the Company or any of its subsidiaries or affiliates shall not be deemed to have ceased by reason of the transfer of the Participant among the Company or any other entity controlled by or under common control with the Company. 12. Taxes. The Company's obligation hereunder shall be subject to the satisfaction by the Participant in a manner acceptable to the Company of all applicable withholding taxes and other withholding obligations. 13. Incidental rights Not Guaranteed. The grant of the Options pursuant to this Agreement shall not be construed as conferring upon the Participant any right to continued employment, and the employment of any Participant may be terminated without regard to the effect which such action may have upon him as a Participant under the Plan. Furthermore, there is no assurance that a public market for the Common Stock of the Company will occur so as to permit the shares of Common Stock received upon the exercise of the Option to be freely tradeable or to have a readily determinable value. 14. Amendments. The Board of Directors of the Company may at any time terminate, amend or modify the Plan or alter the terms of this Option in accordance with the specific terms and conditions set forth in the Plan. 15. Incorporation of Plan. The terms and provisions of the Plan are specifically incorporated herein by reference and made a part hereof. 16. Governing Law. To the extent that federal law shall not be held to preempt local law, this Agreement shall be governed by the laws of the State of Georgia. If any provision of the Agreement shall be held invalid or unenforceable the remaining provisions hereof shall continue in full force and effect. 4 5 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officers as of the date first set forth above. Attest: HEALTHDYNE INFORMATION ENTERPRISES, INC. By: By: -------------------------------- ----------------------------- Secretary President PARTICIPANT -------------------------------- 5 6 EXHIBIT A OPTION EXERCISE FORM (To be executed by the Participant to exercise the rights to purchase Common Stock evidenced by the foregoing Option) TO: HEALTHDYNE INFORMATION ENTERPRISES, INC. The undersigned hereby exercises the right to purchase ___________ shares of Common Stock covered by a Stock Option Agreement, dated ____________________, in accordance with the terms and conditions thereof, and herewith makes payment of the Option Price of such shares in full. --------------------------------------- Participant --------------------------------------- --------------------------------------- (Address) --------------------------------------- (Social Security Number) Dated: ____________________, 19___. EX-10.18 4 FORM OF AGMT.UNDER HIE RESTATED STOCK OPTION PLAN2 1 EXHIBIT 10.18 HEALTHDYNE INFORMATION ENTERPRISES, INC. STOCK OPTION PLAN II NONQUALIFIED STOCK OPTION AGREEMENT OPTION FOR THE PURCHASE OF: _____________ SHARES EXERCISE PRICE PER SHARE: $ This Agreement made and entered into as of this _____ day of ________, ______, by and between Healthdyne Information Enterprises, Inc., a Georgia corporation, hereinafter referred to as the "Company", and name, hereinafter referred to as the "Participant". W I T N E S S E T H: WHEREAS, a Healthdyne Information Enterprises, Inc. Stock Option Plan II, hereinafter referred to as the "Plan", has been adopted by the Company; and WHEREAS, Section 6.1 of the Plan authorizes the Stock Option Committee of Healthdyne, Inc. or the Company, hereinafter referred to as the "Committee", to cause the Company to enter into a written agreement with the Participant setting forth the form and the amount of any award and any conditions and restrictions on the award imposed by the Plan and the Committee; and WHEREAS, the Committee desires to make an award to the Participant consisting of a Nonqualified Stock Option; NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Participant hereby agree as follows: 1. Option Grant. The Company hereby grants to the Participant a Nonqualified Stock Option pursuant to the Plan to purchase the number of shares of Common Stock of the Company set forth above (hereinafter referred to as "Common Stock"), at the price per share set forth above, subject to the terms and conditions of this Agreement. The Nonqualified Stock Option is referred to herein as the "Option". 2. Option Vesting. The Participant agrees that he must remain continuously employed by the Company or any Subsidiary thereof or engaged to provide services thereto for one year from the date of this Agreement in order for the exercise of any part of the Option to accrue. Subject to the preceding sentence and until terminated as provided in Paragraph 4, the Option shall become exercisable on the first anniversary date of this agreement to the extent of thirty-three and one-third percent (33-1/3%) of the shares of Common Stock subject to the Option. The Option shall become exercisable on each of the next two (2) 2 anniversary dates of this Agreement to the extent of an additional thirty-three and one-third percent (33-1/3%) of the shares of Common Stock subject to the Option; provided the Participant shall have been in the continuous employ of the Company or any Subsidiary thereof or engaged to provide services thereto since the date of this Agreement. Although the Option may remain exercisable after a termination of employment under the limited circumstances specifically set forth in Paragraph 4 hereof, vesting of the Option shall cease as of the applicable date of termination or disability referred to in Paragraph 4 and the Option shall be exercisable during such extended periods of time only to the extent that it was exercisable on such date of termination or disability. Notwithstanding the foregoing, as of the date of any dissolution or liquidation of the Company or any merger or combination in which the Company is not a surviving corporation this Option shall terminate, but the Participant shall have the right immediately prior to such termination, in accordance with procedures established by the Committee, to exercise the Option in whole or in part without regard to the installment requirements described above. 3. Manner of Exercise. The Participant may exercise the Option by delivering written notice to the Company on a form set forth in Exhibit A hereto or as otherwise provided by the Committee indicating the number of shares to be purchased. The Company agrees to cause certificates for any shares of Common Stock purchased hereunder to be delivered to the Participant upon payment in full of the Option price in cash, unrestricted shares of Common Stock, or a combination of such Common Stock and cash. Any shares of Common Stock applied toward the Option price shall be valued at their Fair Market Value on the date of exercise of the Option, shall have been held by the holder hereof for at least six (6) months or such longer period of time as may be necessary for such shares to be paid in cash within five (5) days after the date of exercise. If the Participant fails to pay the Option price within five (5) days, the Committee shall have the right in its sole discretion to void the exercise of the Option. 4. Expiration of Option. The Option shall terminate on the earliest to occur of the following dates: (a) The date upon which the Participant is dismissed from his or her employment or consulting engagement with the Company and the Subsidiaries for good cause (as defined by the Participant's employment or consulting agreement or applicable personnel policy, as the case may be) or other serious misconduct (as defined in the Plan); (b) Sixty (60) days after the date on which the Company terminates the Participant's full-time employment or consulting engagement with the Company other than for cause as described in Subsection 4(a) above, retirement, disability (as determined by the Social Security Administration), or death; (c) Twelve (12) months after the Participant's termination of full-time employment or consulting engagement due to his retirement from the Company or any Subsidiary thereof; (d) Twelve (12) months after the Participant's date of death; (e) Twelve (12) months from the date of the disabling event which shall render the Participant totally and permanently disabled, as determined by the Social Security Administration; and 2 3 (f) Six (6) years from the date the Option is granted. For purposes of this Paragraph 4, the date of termination of employment or consulting shall mean the last date upon which such employment services are provided on a full-time basis or such consulting services are regularly provided by the Participant without extension or any severance period or other compensation payable in connection with such termination but with extension for any periods of time related to mandated notices of termination to the extent required to be given to the Participant by the Company or any Subsidiary under any applicable employment agreement or personnel policy. 5. Holder's Exercise Subject to Compliance with Securities Laws. Notwithstanding the exercise of this Option, in whole or in part, in accordance with all other provisions of this Option, the Company shall have no obligation to honor such exercise and to issue Common Stock pursuant thereto unless and until (a) the shares of Common Stock to be purchased pursuant to such exercise shall have been registered under the Securities Act of 1933, as amended, and under all applicable state securities laws, unless the Company shall have received an opinion of counsel satisfactory to the Company to the effect that such registration is not required, or, (b) at the Company's request, the Participant furnishes the Company prior to the issuance of any shares pursuant to the exercise of this Option, an agreement in which the Participant represents that the shares acquired by him upon exercise, if the shares are not registered pursuant to applicable state and/or federal securities laws, are being acquired for investment and not with a view to the sale or distribution thereof. If the foregoing conditions shall not have been met within sixty (60) days after exercise, the Company may elect to treat such exercise as null and void. Upon the Company's election to treat any such exercise as null and void, the Company shall return any cash delivered in payment for shares of Common Stock upon such exercise. No such voided exercise shall prejudice the Optionee's right to exercise this Option, in whole or in part, at any other time. 6. Exercise by Estate Following Death. In the event the Participant shall die prior to the exercise of the Option granted pursuant to this Agreement, the administrator of the deceased Participant's estate, the executor under his will, or the person or persons to whom the Option shall have been validly transferred by such executor or administrator pursuant to the will or laws of intestate succession, shall have the right to exercise the Option to the extent exercisable on the date of the Participant's death, subject to the terms of this Agreement. 7. Liens and Encumbrances. Except as provided in Paragraph 6, no benefit under the Plan or this Agreement shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, excluding the use of Options under the Plan as collateral in exercising the Option, and any attempt to do so shall be null and void. No such benefits shall be in any manner liable for or subject to the debts, contracts, liabilities, engagements, or torts of the Participant prior to the receipt thereof by the Participant. 8. Limitation on Exercise. No election as to benefits or the exercise of the Option may be made during the Participant's lifetime by anyone other than the Participant, or his legal representative in the event of the Participant's disability. In addition, no Option may be exercised within one hundred eighty (180) days after the date of closing of a public offering or public distribution of a portion of the Company's Common Stock following which the Common Stock is registered under Section 12 of the Securities Exchange Act of 1934, unless in the absence of such 3 4 exercise the Option would expire or terminate in accordance with its terms prior to the end of such one hundred eighty (180) day period. 9. Violation of Laws. The Options shall not be exercisable if such exercise would involve a violation of any applicable federal or state securities laws, and the Company hereby agrees to make reasonable efforts to comply with such securities laws. 10. Adjustments by Committee. The Committee shall make such adjustments to the Option price and in the number or kind of shares of Common Stock covered by the Option consistent with the terms of the Plan as the Committee in its sole discretion may determine is equitably required to prevent dilution or enlargement of the rights of the Participant that otherwise would result from (a) any stock dividend, stock split, combination of shares, distribution of assets, recapitalization, or other change in the capital structure of the Company, or (b) any merger, or (c) any other corporate transaction or event having an effect similar to any of the foregoing. 11. Transfer to Subsidiary or Affiliate. The continuous employ or engagement of the Participant with the Company or any of its subsidiaries or affiliates shall not be deemed to have ceased by reason of the transfer of the Participant among the Company or any other entity controlled by or under common control with the Company. 12. Taxes. The Company's obligation hereunder shall be subject to the satisfaction by the Participant in a manner acceptable to the Company of all applicable withholding taxes and other withholding obligations. 13. Incidental Rights Not Guaranteed. The grant of the Options pursuant to this Agreement shall not be construed as conferring upon the Participant any right to continued employment, and the employment of any Participant may be terminated without regard to the effect which such action may have upon him as a Participant under the Plan. Furthermore, there is no assurance that a public market for the Common Stock of the Company will occur so as to permit the shares of Common Stock received upon the exercise of the Option to be freely tradeable or to have a readily determinable value. 14. Amendments. The Board of Directors of the Company may at any time terminate, amend or modify the Plan or alter the terms of this Option in accordance with the specific terms and conditions set forth in the Plan. 15. Incorporation of Plan. The terms and provisions of the Plan are specifically incorporated herein by reference and made a part hereof. 16. Governing Law. To the extent that federal law shall not be held to preempt local law, this Agreement shall be governed by the laws of the State of Georgia. If any provision of the Agreement shall be held invalid or unenforceable the remaining provisions hereof shall continue in full force and effect. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officers as of the date first set forth above. 4 5 Attest: HEALTHDYNE INFORMATION ENTERPRISES, INC. By: By: ------------------------------ ------------------------------ Secretary President PARTICIPANT --------------------------------- 5 6 EXHIBIT A OPTION EXERCISE FORM (To be executed by the Participant to exercise the rights to purchase Common Stock evidenced by the foregoing Option) TO: HEALTHDYNE INFORMATION ENTERPRISES, INC. The undersigned hereby exercises the right to purchase ___________ shares of Common Stock covered by a Stock Option Agreement, dated ____________________, in accordance with the terms and conditions thereof, and herewith makes payment of the Option Price of such shares in full. ------------------------------------------- Participant ------------------------------------------- ------------------------------------------- (Address) ------------------------------------------- (Social Security Number) Dated: ____________________, 19___. EX-10.20 5 FORM OF AGMT.UNDER NON-EMP. DIR. STOCK OPTION PLAN 1 EXHIBIT 10.20 HEALTHDYNE INFORMATION ENTERPRISES, INC. DIRECTOR NONQUALIFIED STOCK OPTION COMMON STOCK ($.01 PAR VALUE) STOCK OPTION PLAN: HEALTHDYNE INFORMATION ENTERPRISES, INC. ADJUSTMENT STOCK OPTION PLAN OPTION FOR THE PURCHASE OF: ____________________ SHARES EXERCISE PRICE PER SHARE: ____________________ HEALTHDYNE DATE OF GRANT: ____________________ THIS OPTION AGREEMENT, made and entered into as of the ____ day of ______________, by and between HEALTHDYNE INFORMATION ENTERPRISES, INC., a Georgia corporation (the "Company"), and ____________________________ (the "Participant"); W I T N E S S E T H: WHEREAS, the HEALTHDYNE INFORMATION ENTERPRISES, INC. Adjustment Stock Option Plan (the "Plan") has been adopted by the Company; and WHEREAS, Section 6.1 of the Plan authorizes the Stock Option Committee of the Board of Directors of the Company, hereinafter referred to as the "Committee," to cause the Company to enter into a written agreement with the Participant setting forth the form and the amount of any award and any conditions and restrictions of the award imposed by the Plan and the Committee; and WHEREAS, the Committee desires to make an award to the Participant consisting of a Nonqualified Stock Option; NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Participant hereby agree as follows: 2 1. General Definitions. For purposes of this Option Agreement, each of the following terms, when used herein, shall have the meaning hereinafter provided: (a) The "Code" shall mean the Internal Revenue Code of 1986, as amended. (b) The "Common Stock" shall mean the common stock of the Company, par value $.01 per share. (c) The "Company" shall mean Healthdyne Information Enterprises, Inc. 3 (d) The "Exercise Date" shall mean the date which is the earlier of (i) the date on which (a) any "person" (as such term is used in Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Act")), becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated pursuant to the Act), directly or indirectly, of securities representing 50% or more of the combined voting power of the Company's or Healthdyne's then outstanding securities or (b) as a result of, or in combination with, any cash tender offer or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the persons who are directors of the Company or Healthdyne before the Transaction cease to constitute a majority of the Board of Directors of the Company or Healthdyne or any successor to the Company or Healthdyne; or (ii) the fourth anniversary of the Healthdyne Date of Grant, provided that this Option shall be exercisable prior thereto as to the percentage of the shares of Common Stock then subject to this Option indicated by the table below, based upon the number of years from the Healthdyne Date of Grant:
NUMBER OF YEARS FROM PERCENTAGE OF SHARES "HEALTHDYNE DATE OF GRANT" - -------------------------------------------------------------------------------- Less than 1 25% At least 1 but less than 2 50% At least 2 but 75% less than 3
Notwithstanding the foregoing, "Exercise Date" shall not include any day during the period beginning on the date of grant of this Option and ending on the trading day after the date on which the Option Price has been determined by the Committee. (e) The "Expiration Date" shall mean the date on which this Option expires pursuant to the provisions of paragraph 4 hereof. (f) "Fair Market Value" shall be the value determined by the Committee on the basis of (i) selling price(s) at which the Company Common Stock is sold in the regular way (or the bid and asked prices if no such sales are reported) as reported by the National Association of Securities Dealers Automated Quotation System (NASDAQ) or any comparable system, or (ii) if such stock is not quoted on NASDAQ or any comparable system the bid and asked prices as furnished by any member of the National Association of Securities Dealers, Inc. selected by the Committee for such purpose; provided, however that the Committee may determine Fair Market Value of the Company's Common Stock in such other manner as it may deem equitable and appropriate under the circumstances if it determines that an adequate trading market in the Company's Common Stock does not then exist. (g) "Good Cause," with respect to any dismissal of Participant from his or her employment with Healthdyne, shall mean the dismissal of the Participant from such employment by Healthdyne by reason of (i) the Participant's being convicted of, or pleading guilty or 3 4 confessing to, any felony or any act of fraud, misappropriation or embezzlement, (ii) the Participant's improperly releasing or misappropriating trade secrets or other tangible or intangible property of Healthdyne or engaging in a dishonest act to the damage or prejudice of Healthdyne or in willful or grossly negligent conduct or activities materially damaging to the property, business or reputation of Healthdyne, or (iii) the Participant's failing, without reasonable cause, to devote his or her full business time and efforts to Healthdyne. (h) "Healthdyne" shall mean Healthdyne, Inc. except that as used in paragraph 1(g) hereof, "Healthdyne" shall mean Healthdyne, Inc. and each of its Subsidiaries and as used in Section 4 shall include any successor in interest to all or substantially all of the business or assets of Healthdyne. (i) "Healthdyne Date of Grant" shall mean the date of grant (indicated on page 1) of the option granted under the Healthdyne Inc. Non-Employee Director Stock Option Plan that corresponds to the Option granted in this Agreement. (j) This "Option" shall mean the option evidenced by this Option Agreement. (k) The "Option Price" shall mean the purchase price of each share of Common Stock that may be purchased by Participant upon the exercise of this Option, in whole or in part, as adjusted from time to time in accordance with the provisions hereof. (l) "Subsidiary" or "Subsidiaries" shall mean the Company, and any corporations now or hereafter existing which are "subsidiary corporations" of Healthdyne or the Company within the meaning of Section 424(f) of the Code. 2. Grant of Option. Upon the terms and subject to the conditions and limitations hereinafter set forth, the Participant shall have the right, at any time after the Exercise Date and on or before the Expiration Date, to purchase the number of shares of Common Stock set forth on page 1 of this Option Agreement, such number of shares being subject to adjustment in accordance with the provisions set forth below. The purchase price of the shares of Common Stock that may be purchased upon the exercise of this Option in whole or in part shall be the price per share set forth under "Exercise Price Per Share" on page 1 of this Option Agreement, subject, however, to adjustment in accordance with the provisions set forth below. In addition, the Exercise Price and number of shares subject to this Option may be adjusted from time to time in accordance with the terms of the Plan notwithstanding anything to the contrary herein. 3. Manner of Exercise. Subject to the terms, conditions, and limitations set forth herein, this Option may be exercised in whole or in part at any time or from time to time after the Exercise Date and on or before the Expiration Date as to any part of the number of whole shares of Common Stock then subject to this Option. Such exercise shall be effective only if the Participant duly executes and delivers to the Company, at the principal executive office of the Company or at such other address as the Company may designate by notice in writing to the Participant, an option exercise form substantially the same as that attached hereto as Exhibit A, indicating the number of shares of Common stock to be purchased and accompanied by either (a) cash in an amount equal to the purchase price of such shares, (b) a certificate or certificates, duly 4 5 endorsed in blank or accompanied by duly executed stock power(s), for that number of "mature" shares (as defined by generally accepted accounting principles) of Common Stock having a value equal to the purchase price of the shares of Common Stock as to which this Option is being exercised, with the value of a share of Common Stock so exchanged being its Fair Market Value on the trading day immediately preceding the date of purchase, or (c) a combination of cash and certificates in the form provided by (b) above with an aggregate value equal to the purchase price of such shares. Upon any effective exercise of this Option, the Company shall become obligated to issue a certificate or certificates to the Participant representing the number of shares of Common Stock so purchased. No fractional shares will be issued. 4. Expiration of Option. This Option shall expire, shall become null and void, and shall be of no further force and effect upon the earlier to occur of the following events: (a) Three months after the date of the Participant's resignation or other voluntary termination of his or her employment or, if a participant in the Non-Employee Director Stock Option Plan of Healthdyne, his or her position as a member of the Board of Directors with Healthdyne or any Subsidiary (other than by reason of his or her death or "disability" within the meaning of Section 72(m)(7) of the Code), but during such three month period the Option shall be exercisable only to the extent that it was exercisable as of the date of resignation or termination; (b) Healthdyne's or any Subsidiary's dismissal of the Participant from his or her employment or, if a participant in the Non-Employee Director Stock Option Plan of Healthdyne, his or her position as a member of the Board of Directors with Healthdyne for Good Cause at any time; (c) Three months after the date on which Healthdyne or any Subsidiary terminates Participant's employment or, if a participant in the Non-Employee Director Stock Option Plan of Healthdyne, his or her position as a member of the Board of Directors for any reason other than Good Cause, but during such three month period the Option shall be exercisable only to the extent that it was exercisable as of the date of termination; (d) One year after the date on which Participant's employment or, if a participant in the Non-Employee Director Stock Option Plan of Healthdyne, his or her position as a member of the Board of Directors with Healthdyne or any Subsidiary is terminated by reason of the Participant's death or "disability" within the meaning of Section 72(m)(7) of the Code, but during such one year period the Option shall be exercisable only to the extent that it was exercisable as of the date of death or disability; or (e) The fifth anniversary of the Healthdyne Date of Grant. Notwithstanding any of the foregoing, the termination of a Participant's employment or position as a member of the Board of Directors with one or more but not all of the Company, Healthdyne or any Subsidiary shall not cause this Option to expire under Subsections (a), (b), (c) or (d) of this Section 4 as long as the Participant retains a position of employment or as a member of the Board of Directors of at least one of such entities. 5 6 5. Holder's Exercise Subject to Compliance with Securities Laws. Notwithstanding the exercise of this Option, in whole or in part, in accordance with all other provisions of this Option, the Company shall have no obligation to honor such exercise and to issue Common Stock pursuant thereto unless and until the shares of Common Stock to be purchased pursuant to such exercise shall have been registered under the Securities Act of 1933, as amended (the "1933 Act"), and under all applicable state securities laws, or unless the Company shall have received an opinion of counsel satisfactory to the Company to the effect that such resignation is not required. If the foregoing conditions shall not have been met within 60 days after exercise, the Company may elect to treat any such exercise as null and void, the Company shall return any cash and certificate(s) for shares of Common Stock (duly endorsed in blank or accompanied by duly executed stock power(s)) delivered in payment for shares of Common Stock upon such exercise. No such voided exercise shall prejudice the Participant's right to exercise this Option, in whole or in part, at any other time. 6. Adjustment of Option Price and Number of Shares That May be Purchased Hereunder. The Option Price and the number of shares of Common Stock that may be purchased hereunder shall be subject to adjustment from time to time in accordance with the terms of the Plan and the following provisions: (a) In the event of the issuance of additional shares of Common Stock as a dividend, from and after the record date for the determination of shareholders entitled to such dividend the Participant (until another such adjustment, if any) shall be entitled to purchase under this Option the number of shares of Common Stock, calculated to the nearest full share, obtained by multiplying the number of shares of Common Stock subject to this Option immediately prior to said record date by the percentage that the number of additional shares constituting any such dividend is of the total number of shares of Common Stock outstanding immediately prior to said record date and adding the result so obtained to the number of shares of Common Stock subject to this Option immediately prior to said record date. Upon each adjustment made pursuant to this subparagraph (a) to the number of shares of Common Stock that the Participant may purchase under this Option, the Option Price in effect immediately prior to such adjustment shall be reduced to an amount determined by dividing (i) the product obtained by multiplying such Option Price by the number of shares of Common Stock subject to this Option immediately prior to such adjustment by (ii) the number of shares of Common Stock subject to this Option immediately following such adjustment. (b) If the Company should at any time subdivide the outstanding shares of its Common Stock, the Option Price in effect immediately prior to such subdivision shall be proportionately decreased, and if the Company should at any time combine the outstanding shares of its Common Stock, the Option Price in effect immediately prior to such combination shall be proportionately increased, effective from and after the record date of such subdivision or combination, as the case may be. Upon each adjustment of the Option Price made pursuant to this subparagraph (b), the Participant (until another such adjustment, if any) shall be entitled to purchase, at the adjusted Option Price, the number of shares of Common Stock, calculated to the nearest full share, obtained by dividing (i) the product obtained by multiplying the number of 6 7 shares of Common Stock subject to this Option immediately prior to such adjustment by the Option Price in effect prior to such adjustment by (ii) the adjusted Option Price. 7. Reorganization, Reclassification, Consolidation or Merger. If at any time while this Option is outstanding there should be any reorganization or reclassification of the Common Stock of the Company (other than a subdivision or combination of shares provided for in paragraph 6 above), or any consolidation or merger of the Company with another corporation, then the number of shares of Common Stock or other securities or property of the Company of the successor corporation resulting from such consolidation or merger, as the case may be, to which a holder of the number of shares of Common Stock that may then be purchased upon the exercise of this Option would have been entitled upon such reorganization, reclassification, consolidation or merger, may thereafter be purchased hereunder in lieu of the shares of Common Stock theretofore subject to this Option; and in any such case, appropriate adjustment (as determined by agreement of this Participant and the Company) shall be made in the application of the provisions herein set forth with respect to the rights and interest thereafter of the Participant to the end that the provisions set forth herein (including the adjustment of the Option Price and the number of shares issuable upon the exercise of this Option) shall thereafter be applicable, as nearly as reasonably may be, in relating to any shares or other property that may thereafter be purchased thereunder. 8. Notice of Adjustments. Upon occurrence of any adjustment of the Option Price, any increase or decrease in the number of shares of Common Stock that may be purchased upon the exercise of this Option, or any reorganization, reclassification, consolidation, merger or other transaction to which paragraph 7 hereof shall apply, then, and in each such case, the Company, within 30 days thereafter, shall give written notice thereof to the Participant at the address of the Participant as shown on the books of the Company, which notice shall the Option Price as adjusted and the increased or decreased number of shares that may be purchased upon the exercise of this Option, setting forth in reasonable detail the method of calculation of each. 9. Charges, Taxes and Expenses. The issuance of certificates for shares of Common Stock upon any exercise of this Option shall be made without charge to the Participant for any transfer tax or other such expense imposed or incurred with respect to the issuance of such certificates, all of which taxes and expenses shall be paid by the Company. 10. Certain Obligations of the Company. The Company shall not, by amendment of its Articles of Incorporation or through reorganization, consolidation, merger, dissolution or sale of assets or by any other voluntary act or deed avoid or seek to avoid the performance or observance of any of the covenants, stipulations or conditions contained herein to be performed or observed by the Company, but will at all times in good faith assist, insofar as it is able, in the carrying out of all provisions of this Option and in the taking of all other actions that may be necessary to protect the rights of the Participant against dilution. Without limiting the generality of the foregoing, the Company agrees that it will not establish or increase the par value of the shares of any Common Stock that are at the time issuable upon exercise of this Option above the then prevailing Option Price hereunder and that before taking any action that would cause an adjustment reducing the Option Price hereunder below the then par value, if any, of the shares of any Common Stock that may be purchased upon the exercise of this Option, the Company will 7 8 take any corporate action that, in the opinion of its counsel, may be necessary so that the Company may validly and legally issue fully-paid and nonassessable shares of such Common Stock at the Option Price as so adjusted. 11. Assignment. This Option may not be transferred or assigned by the Participant otherwise than by will or by the laws of descent and distribution and, during the lifetime of the Participant, may be exercised, in whole or in part, only by the Participant. Subject to paragraph 4(d) hereof, in the event of the Participant's death, this Option may be exercised by his or her personal representative, heirs or legatees. 12. Miscellaneous. (a) The Company covenants that it will at all times reserve and keep available, solely for the purpose of issue upon the exercise of this Option, a sufficient number of shares of Common Stock to permit the exercise of this Option in full. (b) The terms of this Option shall be binding upon and shall inure to the benefit of any successors or assigns of the Company and of the Participant. (c) The Participant shall not be entitled to vote or to receive dividends with respect to any Common Stock that may be, but has not been, purchased under this Option and shall not be deemed to be a shareholder of the Company with respect to any such Common Stock for any purpose. (d) This Option has been issued pursuant to the Plan and shall be subject to, and governed by, the terms and provisions thereof. 8 9 IN WITNESS WHEREOF, the Company and the Participant have executed this Option Agreement as of the day and year first above written. Healthdyne Information Enterprises, Inc. (Corporate Seal) By: ----------------------------------------- Authorized Signature Attest: - ---------------------------------- Secretary Participant: -------------------------------------------- 9 10 EXHIBIT A OPTION EXERCISE FORM (To be executed by the Employee to exercise the rights to purchase Common Stock evidenced by the foregoing Option) TO: Healthdyne Information Enterprises, Inc. The undersigned hereby exercises the right to purchase ___________ shares of Common Stock covered by the attached Option in accordance with the terms and conditions thereof, and herewith makes payment of the Option Price of such shares in full. -------------------------------------------- Signature -------------------------------------------- -------------------------------------------- Address -------------------------------------------- Social Security Number Date: __________________, 19____ EX-10.24 6 HIE EMPLOYEE STOCK PURCHASE PLAN ENROLLMENT FORM 1 EXHIBIT 10.24 HEALTHDYNE INFORMATION ENTERPRISES, INC. ("HIE") EMPLOYEE STOCK PURCHASE PLAN (A) ENROLLMENT, PAYROLL DEDUCTION AUTHORIZATION AND WITHDRAWAL FORM CONFIDENTIAL To: HIE Human Resources Department Fm: ; ---------------------------------------- --------------------------- (printed name) (signature) Date: ---------------------------------------- Subj: Employee Stock Purchase Plan ("ESPP") 1. INDICATE WITH AN X ONE (AND ONLY ONE) START DATE (INCLUDING THE YEAR) FROM THE FOLLOWING LIST: _____ January 1, 199__ (b) _____ April 1, 199__ (b) _____ July 1, 199__ (b) _____ October 1, 199__ (b) 2. INDICATE THE DOLLAR AMOUNT TO BE WITHHELD FROM YOUR PAYCHECK EACH PAYDAY: $__________________ (MUST BE at least $25, but less than 10% of such compensation) 3. PRINT THE EXACT NAME FOR THE STOCK CERTIFICATE AND COMPLETE MAILING ADDRESS: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 4. PRINT THE NAME, RELATIONSHIP (IF ANY) AND ADDRESS OF YOUR DESIGNATED BENEFICIARY (TO BE USED IN THE EVENT OF YOUR DEATH): --------------------------- - ------------------------------------------------------------------------------- THE FOLLOWING IS APPLICABLE ONLY TO ESPP PARTICIPANTS DESIRING TO STOP THEIR PAYROLL DEDUCTIONS FOR THE ESPP: Stop my ESPP payroll deductions effective with the payroll period starting ______________(date) and (CHECK ONE) _________ return my accumulated ESPP payroll deductions (without interest) to me as soon as possible OR _____ use my accumulated ESPP payroll deductions to purchase the appropriate number of shares of HIE common stock at the end of the quarterly period as provided for by the ESPP. ----------------------------------------------- NOTES: A copy of the HIE ESPP is available at the reception desk in each office. Once enrolled, your enrollment will carryover to future quarters. In other words, you do not have to enroll each quarter to remain in the ESPP. To terminate your participation in the ESPP while still an employee, you must complete the TERMINATION section of this form above and submit it to Payroll. ---------------------------------------------- FOR PAYROLL USE ONLY: Reviewed by - Date - ------------------ ------------- EX-11 7 STATEMENT OF COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (LOSS) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ------------------------------------ 1997 1996 1995 ---- ---- ---- Net earnings (loss) $(6,166) $ 1,183 $ (9,983) ======= ======== ======== Weighted average number of common shares outstanding 20,336 17,481 15,653 ======= ======== ======== Basic net earnings (loss) per common share $ (.30) $ .07 $ (.64) ======= ======== ======== Shares used in diluted net earnings (loss) per share calculation: Weighted average number of common shares outstanding 20,336 17,481 15,653 Additional shares assumed outstanding from dilutive stock options used in diluted earnings (loss) per share calculation -- * 1,395 -- * ------- -------- -------- 20,336 18,876 15,653 ======= ======== ======== Diluted net earnings (loss) per common share $ (.30) $ .06 $ (.64) ======= ======== ========
- ------------- * Since stock options are antidilutive to the loss per common share calculations, stock options are not considered in such loss per share calculations in 1997 and 1995. EX-21 8 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 HEALTHDYNE INFORMATION ENTERPRISES, INC. SUBSIDIARIES OF THE COMPANY AS OF DECEMBER 31, 1997
JURISDICTION OF NAMES UNDER WHICH NAME INCORPORATION SUBSIDIARIES DO BUSINESS ---- ------------- ------------------------ Criterion Health Strategies, Inc. Tennessee Healthdyne Information Enterprises, Inc. DataView Imaging International, Inc. Georgia Healthcare Communications, Inc. Texas Healthdyne Information Enterprises, Inc. Integrated Healthcare Solutions, Inc. Georgia Healthdyne Information Enterprises, Inc. (formerly, Clinical Assessment Support System, Inc.)
Note: The above subsidiaries (except for DataView Imaging International, Inc. in which the Company owns 19.5% equity ownership interest) are wholly-owned subsidiaries of the Company. EX-23 9 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23 ACCOUNTANTS' CONSENT The Board of Directors Healthdyne Information Enterprises, Inc. We consent to incorporation by reference in the registration statements (Nos. 33-99034, 333-08271, 333-08279, 333-08283, 333-08287, 333-08293, and 333-08295) on Form S-8 of Healthdyne Information Enterprises, Inc. of our reports dated January 23, 1998, relating to the consolidated balance sheets of Healthdyne Information Enterprises, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows and related schedule for each of the years in the three-year period ended December 31, 1997, which reports appear in the December 31, 1997 annual report on Form 10-K of Healthdyne Information Enterprises, Inc. KPMG PEAT MARWICK LLP Atlanta, Georgia March 20, 1998 EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE HEALTHDYNE INFORMATION ENTERPRISES, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE HEALTHDYNE INFORMATION ENTERPRISES, INC. CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 7,732 0 6,035 407 0 14,698 2,487 1,013 28,008 9,376 260 0 0 209 17,883 28,008 0 15,552 0 5,908 15,846 242 310 (6,166) 0 (6,166) 0 0 0 (6,166) (0.30) (0.30)
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